Income Tax Avoidance and Evasion: A Narrow Bracketing Approach

We characterize optimal individual tax evasion and avoidance when taxpayers ìnarrow bracketî the joint avoidance/evasion decision by exhausting all gainful methods for legal avoidance before choosing whether or not also to evade illegally. We Önd that (i) evasion is an increasing function of the audit probability when the latter is low enough, yet tax avoidance is always decreasing in the probability of audit; (ii) an analogous Önding to the so-called Yitzhaki puzzle for evasion also holds for tax avoidance ñan increase in the tax rate decreases the level of avoided income and the level of avoided tax; and (iii) that, holding constant the expected return to evasion, it is not always the case that the combined loss of reported income due to avoidance and evasion can be stemmed by increasing the Öne rate and decreasing the audit probability

Third Time’s a Charm? Assessing the Impact of the Third Phase of the EU ETS on CO₂ Emissions and Performance

The EU Emissions Trading System (ETS) is the largest cap-and-trade scheme for CO2 emissions globally. This study evaluates the impact on CO2-equivalents emission of the increased stringency of Phase 3, which marked a significant shift from the previous phases of the EU ETS and significantly reduced the number of emissions permits (EU Allowances—EUA) freely allocated. Our analysis reveals that the increase of purchased EUA had a statistically significant, substantial impact on emissions reduction from Phase 2 to Phase 3, with a decrease in emissions of approximately half a ton for each additional allowance bought. Our (conservative) estimate of the total reduction in emission is 422 MtCO2-eq, 22.5% of the average yearly EU ETS emissions or 4.3–3.0% of emissions in Phases 2 and 3, respectively. Under Article 10c of the ETS directive, lower-income Member States have been allowed to continue the free allocation of EUA to electricity-generating installations during Phase 3 to provide more time and resources for modernization. We show that such derogation had a sizeable and significant detrimental impact on the achievement of emission reduction targets, leading to an increase in emissions of about half a ton for each additional allowance bought; a result that highlights the need for increased efforts on support measures (e.g., the Modernization Fund). We also investigate the impact of the EU ETS on output, capital productivity, and labour productivity. Our analysis indicates that the performances were not negatively impacted by the tightening in regulation that occurred between Phases 2 and 3. We also find no evidence that the derogation status impacted performances, which further ameliorates the concerns about the potential intra-EU competitive distortions induced by the regulation. Our results cast a favourable light on the reduction of the free allocation of EUA and the tightening of the regulation implemented in Phase 4 of the EU ETS

Tax Evasion on a Social Network

We relate tax evasion behavior to a substantial literature on self and social comparison in judgements. Taxpayers engage in tax evasion as a means to boost their expected consumption relative to others in their "local" social network, and relative to past consumption. The unique Nash equilibrium of the model relates optimal evasion to a (Bonacich) measure of network centrality: more central taxpayers evade more. The indirect revenue effects from auditing are shown to be ordinally equivalent to a related Bonacich centrality. We generate networks corresponding closely to the observed structure of social networks observed empirically. In particular, our networks contain celebrity taxpayers, whose consumption is widely observed, and who are systematically of higher wealth. In this context we show that, if the tax authority can observe the social network, it is able to raise its audit revenue by around six percent

Tax avoidance and evasion in a dynamic setting

We study an intertemporal utility maximization problem where taxpayers can engage in both tax avoidance and tax evasion. Evasion is costless but is fined if discovered, while avoidance is costly but might be successful (i.e. deemed legitimate) with a given probability upon audit. We find that traditional deterrence instruments (fine and frequency of audit) reduce optimal evasion but, in contrast with results in a static framework, they have no impact on optimal avoidance. In fact, tax avoidance depends negatively on its marginal cost and positively on both its probability of success and the tax rate. We show that non-compliance behavior may result in a Laffer curve for fiscal revenues and that the revenue maximizing tax rate is lower the higher . We characterize the optimal level of by taking into account different government objectives: minimizing evasion, minimizing non-compliance (evasion plus avoidance), or maximizing revenues. Our results suggest that specific policies (e.g., tax simplification) need to be implemented to deter avoidance and we illustrate their impact on evasion