The Macroeconomic Consequences of Tax Noncompliance

• Applicants: Dr. Georgi Kocharkov, Ph.D.; Professorin Dr. Almuth Scholl
• Subject Area: Economic Policy, Applied Economics ; Economic Theory
• Term: from 2019 to 2024
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 419037356

Standard economic theory of income taxation and redistribution assume full tax compliance. However, tax evasion and tax avoidance are substantial not only in developing countries but also in industrialized economies. Sizeable tax gaps raise the important question of the impact of tax noncompliance on equity and economic efficiency.The objective of this research project is twofold. First, we study the impact of tax evasion and tax avoidance on macroeconomic aggregates and the distribution of income and wealth. Second, we discuss the policy implications of tax noncompliance for the taxation of income. To understand the theoretical mechanisms and to perform policy experiments, we incorporate tax evasion and tax avoidance in dynamic stochastic general equilibrium models with heterogeneous agents and incomplete insurance markets. We organize our research project along three main topics. First, we study how the illegal misreporting of income affects aggregate and distributional outcomes and analyze tax reforms in the presence of tax evasion. Second, we focus on the legal strategies that wealthy households employ in order to reduce their tax liabilities. We explore the distributional implications of tax avoidance by wealthy households and discuss the consequences for the taxation of top income earners. Third, we focus on tax avoidance by multinational corporate firms who shift their profits to low-tax destinations. We study how international tax avoidance by corporations affect aggregate economic outcomes and discuss the implications for corporate taxation.

• DFG Programme: Research Grants