Tax Evasion and Tax Compliance

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  • Topic: Tax, Taxation, Tax avoidance and tax evasion
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52
6020
T
AX
E
VASION AND
T
AX
C
OMPLIANCE
Luigi Alberto Franzoni
University of Bologna, Italy
© Copyright 1999 Luigi Alberto Franzoni
Abstract
This
chapter offers an overview of the theoretical and empirical research on tax evasion, delineating the variety of factors affecting noncompliance and examining
possible remedies. Particular emphasis is placed on the institutional and procedural rules governing the tax enforcement policy.
JEL classification:
K34
Keywords:
Tax Enforcement, Compliance, Taxpayer’s Behavior, Tax Gap
1. Introduction
Tax evasion is
said to occur when individuals deliberately fail to comply with their
tax obligations. The resulting tax revenue loss may cause serious damage to
the proper functioning of the public sector, threatening its capacity to finance its basic expenses.
Although tax compliance is a major concern for all governments and analytical
investigation of tax evasion can be traced as far back as the work, one of
the pioneers of ‘law and economics’, Cesare Beccaria (1764), the problem was
long segregated from the main body of economics and left essentially to the attention
of tax authorities and jurisprudence. The modern use of economic tools
for the analysis of tax compliance can be credited to Allingham and Sandmo
([1972] 1991), who extended the influential work of Becker (1968) on law enforcement to taxation using modern risk theory.
In
the decades since, the literature on tax evasion has blossomed (as witnessed
by the voluminous bibliography enclosed). Probably no aspect of tax compliance
has escaped at least preliminary scrutiny. Detailed introductions to this
theme are now available, as in the monographs of Cowell (1990) (theoretically
oriented) and Roth, Scholtz and Witt (1989) (an interdisciplinary perspective),
and the surveys of Andreoni, Erard and Feinstein (1998)
(including
a thorough discussion of empirical results) and Slemrod and
Yitzhaki
(1998) (with large sections devoted to avoidance and administration). As
a complex phenomenon, tax compliance can be addressed from a variety of
perspectives. Taxpayers’ stance is influenced by many factors, including their
disposition towards public institutions, the perceived fairness of the taxes, 6020
Tax Evasion and Tax Compliance
53
prevailing
social norms, and the chances of noncompliance being detected and punished.
Without questioning the relevance of ethical and sociological motivations,
the economic analysis of tax compliance has focused mainly on how
evasion can be deterred through detection and sanctions. The thesis is that the
taxpayer’s behavior can be fruitfully seen as the result of a rational calculus, a
careful assessment of the costs and benefits of evasion. Since even in the simple
st tax and enforcement systems the incentives to comply are far from obvious,
this economic perspective offers precious insights that can be used to derive
suitable policy measures. Yet, given the complexity of the economic set-up
in which the taxpayer usually makes compliance decisions, no simple policy
prescription should be expected. In fact, as we will see, to date theoretical
and empirical research has managed to establish very few firm points.
Nevertheless, the general picture of tax compliance is much clearer now than just a
few decades ago. At least the literature has shown that evasion is a serious
problem, too complex to be solved by simple policy adjustments, and that the set of instruments for controlling it is vast.
This
chapter provides an overview of the findings of the theoretical and the empirical
literature on tax evasion. Section 2 defines tax evasion, as opposed to
tax avoidance and other unlawful activities. In Section 3, Allingham and Sandmo’s
basic model of tax evasion is presented and discussed, with a brief review
of its numerous extensions. Section 4 surveys the empirical evidence on taxpayer
compliance. Section 5 deals with optimal tax enforcement...
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