SHADOW OR UNDERGROUND eco-nomic activity is a fact of life around the world, and there are strong indica-tions that it is increasing. Most societies attempt to control these activities

Previous analyses have modeled income tax evasion as a ‘portfolio problem’, deriving the optimal consumption of the ‘risky asset ’ (unreported income) assuming a fixed probability of detection. We compare an alternative audit policy to the standard random audit policy. We focus on an ‘audit cut08 policy, in which an agent triggers an audit if reported income is ‘too low’, and is not audited if reported income is ‘sufficiently high’. We find that random audit rules are weakly dominated by audit cutoff rules. Given lump-sum taxes and tines, audit cutoff rules are the least-cost policies which induce truthful reporting of income. 1.

Tax evasion, by its very nature, is difficult to observe. We quantify the effects of tax rates on tax evasion by examining the relationship in China between the tariff schedule and the “evasion gap, ” which we define as the difference between Hong Kong’s reported exports to China at the product level and China’s reported imports from Hong Kong. Our results imply that a one-percentage-point increase in the tax rate is associated with a 3 percent increase in evasion. Furthermore, the evasion gap is negatively correlated with tax rates on closely related products, suggesting that evasion takes place partly through misclas-sification of imports from higher-taxed categories to lower-taxed ones, in addition to underreporting the value of imports. I.

Tax compliance has been studied in economics by analysing the individual decision of a representative person between paying and evading taxes. A neglected aspect of tax compliance is the interaction of taxpayers and tax authorities. The relationship between the two actors can be understood as an implicit or "psychological " contract. Studies on tax evasion in Switzerland show that the more strongly the political participation rights are developed, the more important this contract is, and the higher tax morale is. In this paper, empirical evidence based on a survey of tax authorities of the 26 Swiss states (cantons) is presented, indicating that the differences in the treatment of taxpayers by tax authorities can be explained by differences in political participation rights as well.

We study effects on accountability in government service delivery of decentralizing administration of an antipoverty program. While governments at both central and local levels are vulnerable to anti-poor policy biases owing to political capture, centralized delivery systems are additionally prone to bureaucratic corruption owing to problems in monitoring bureaucratic performance. Decentralizing the delivery system promotes cost-effectiveness and improves intra-regional targeting at low program scales. But inter-regional targeting may deteriorate, as central grants to high poverty regions shrink, owing to high capture of local governments by local elites in such regions.

Why so many people pay their taxes, even though fines and audit probability are low, is a central question in the tax compliance literature. Positing a homo oeconomicus having a refined motivation structure sheds light on this puzzle. This paper provides empirical evidence for the relevance of conditional cooperation, using survey data from 30 West and East European countries. We find a high correlation between perceived tax evasion and tax morale. The results remain robust after exploiting endogeneity and conducting several robustness tests. We also observe a strong positive correlation between institutional quality and tax morale.

Abstract. I study a model of strategic communication between an informed Sender and an uninformed Receiver. The Sender bears a cost of lying, or more broadly, of misrepresenting his private information. The main results show that inflated language naturally arises in this environment, where the Sender (almost) always claims to be a higher type than he would under complete information. Regardless of the intensity of lying cost, there is incomplete separation, with some pooling on the highest messages. The degree of language inflation and how much information is revealed depends upon the intensity of lying cost. The analysis delivers a framework to span a class of cheap talk and verifiable disclosure games, unifying the polar predictions they make under large conflicts of interest. I apply the model to highlight how the degree of manipulability of information can affect the tradeoff between delegation and communication.

This paper generalizes the standard model of how taxes affect the labor-leisure choice by allowing individuals to change both their labor supply and avoidance effort in response to tax changes. Doing so reveals that the income and substitution effect of taxes depend on both preferences and the avoidance technology. Econometric analysis will not in general allow one to separately identify the two influences, unless one can specify observable determinants of the cost of avoidance. The effective marginal tax rate on working must be modified by the addition of an avoidance-facilitating effect, which measures how the cost of avoidance changes with higher income. This model provides a conceptual structure for evaluating to what extent, and in what situations, the opportunities for tax avoidance mitigate the real substitution response to taxation.

This paper analyses how tax morale and countries ’ institutional quality affect the shadow economy, controlling in a multivariate analysis for a variety of potential factors. The literature strongly emphasizes the quantitative importance of these factors to understand the level and changes of shadow economy. Relatively new available data sources offer the unique opportunity to shed more light in the understanding of a topic that has received an increased attention. We find strong support that a higher tax morale and a higher institutional quality lead to a smaller shadow economy. Key Words: JEL-Code: Shadow economy, tax morale, institutional quality, government intervention,

From an economic point of view, legal considerations apart, tax avoidance, tax evasion and tax flight have similar effects, namely a reduction of revenue yields, and are based on the same desire to reduce the tax burden. Due to legal differences and moral concerns it is, however, likely that individuals perceive them as different and as unequally fair. Overall, 252 fiscal officers, business students, business lawyers, and entrepreneurs produced spontaneous associations to a scenario either describing tax avoidance, tax evasion, or tax flight, and evaluated them as positive, neutral or negative. The results indicate that everyday representations differ with respect to tax avoidance, tax evasion, and tax flight. Tax evasion was perceived rather negatively, tax flight neutrally, and tax avoidance positively. Although fiscal officers judged all forms of tax reduction least fair, all sub-samples found tax evasion less fair than tax avoidance or tax flight. With regard to knowledge of tax law and fairness perception, differential effects were found: Business lawyers and entrepreneurs judged tax avoidance the fairer the higher their knowledge was. Fiscal officers, on the other hand, found tax evasion especially unfair if their knowledge was high.