Effects of Tax Evasion

International Tax and Public Finance, 7, 177–194, 2000. c 2000 Kluwer Academic Publishers. Printed in The Netherlands.

Decomposing Revenue Effects of Tax Evasion and Tax Structure Changes
ARINDAM DAS-GUPTA* [e-mail] Gokhale Institute of Politics and Economics, B MCC Road, Pune 411004, Maharashtra, India IRA N. GANG [e-mail] Department of Economics, Rutgers University, New Brunswick, NJ 08901-1248 USA

Abstract
This paper proposes a method for evaluating the impact of tax structure changes on tax revenue. The technique consists of decomposing the gap between actual revenue and potential revenue into components attributable to changes in (i) the tax rate structure (ii) deductions and (iii) tax evasion. Our results indicate that, for the Indian reform episode we examine, there were initial gains which could not be sustained over time. The magnitude of the gains from the reform were limited and failed to significantly curtail losses from tax evasion. JEL Code: H20, H24, H23, H26

1.

Introduction

This paper proposes a method for examining the impact of changes in the structure of a tax on tax revenue. The technique consists of decomposing, via an identity, the gap between actual and potential revenue from the tax into components attributable to changes in (i) the tax rate structure (ii) exclusions and (iii) tax evasion. Potential revenue is taken here to mean the revenue that would have resulted from the tax in the absence of base-narrowing exclusions and tax evasion. The decomposition can be extended further, if data are available, to sub-categories of these components or to different taxpayer groups. Our method can be used to analyze structural changes in any broad-based tax. Here we focus on the personal income-tax. Two types of studies are related to the methodology developed here. The first studies fiscal capacity and fiscal effort. This is done, for example, by the Advisory Commission on Intergovernmental Relations (ACIR)

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