Tax progressivity, income distribution and tax non-compliance

Tatiana Damjanovic, David Tregear Ulph

    Research output: Contribution to journalArticlepeer-review

    6 Citations (Scopus)

    Abstract

    This article examines the determinants of tax non-compliance when we recognise the existence of an imperfectly competitive "tax advice" industry supplying schemes which help taxpayers reduce their tax liability. We apply a traditional industrial organisation framework to model the behaviour of this industry. This tells us that an important factor determining the equilibrium price and hence, the level of non-compliance, is the convexity of the demand schedule. We show that in this context, this convexity is affected by the distribution of pre-tax income, the progressivity of the tax-schedule and the way in which monitoring and penalties vary with income. It is shown that lower pre-tax income inequality as well as a less progressive tax code may cause more tax minimisation activities. Therefore, the frequently advocated policy of reducing the highest tax rate may fail as a policy directed at improving tax discipline. One way of offsetting the possible harm to tax compliance from a less progressive tax could be an adjustment of the penalty and monitoring functions. (C) 2009 Elsevier B.V. All rights reserved.

    Original languageEnglish
    Pages (from-to)594-607
    Number of pages14
    JournalEuropean Economic Review
    Volume54
    Issue number4
    Early online date30 Sept 2009
    DOIs
    Publication statusPublished - May 2010

    Keywords

    • Tax compliance
    • Tax administration
    • Inequality
    • Tax progressivity
    • Tax monitoring
    • Penalty function
    • CONSISTENT CONJECTURES
    • EVASION
    • CORRUPTION
    • UNCERTAINTY
    • INEQUALITY
    • AVOIDANCE
    • TAXATION
    • MODEL
    • FIRM

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