Tax Evasion and Enforcement Spillovers: Distributional Implications for Developing Economies

• Applicant: Dr. Albrecht Bohne
• Subject Area: Economic Policy, Applied Economics
• Term: from 2020 to 2022
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 444611843

Reducing tax evasion is a key policy goal, in particular for developing economies, where a large share of the economic activity operates outside of the official tax and transfer system. The overarching research objective of this project is to assess how to initiate the transition from a predominantly informal to a formal economy. A unique combination of policy reforms, natural experiments and quasi-experimental variation allows to characterize this transition process with micro-level evidence on the behavior of individual taxpayers and firms. At the same time, the setting provides the opportunity to assess a number of long-standing issues in public finance, among them the distributional impacts of tax evasion, the spillover effects of a given tax form on various different tax bases, and behavioral responses to taxation. The study draws on detailed administrative register data from Ecuador, complemented by a novel survey on price dispersion between formal and informal sales of businesses. A first part of this research project aims to provide a unified assessment of the spillover and general equilibrium effects of a micro-oriented policy targeting the personal income tax (PIT) system. I will quantify spillovers on different tax bases, including the value-added tax (VAT), corporate business tax, and PIT of self-employed, both at the intensive and extensive margin, as well as spillovers in the form of formal-sector employment responses. The second part of the project deals with the distributional consequences of tax evasion and aims to assess how the benefits of evasion are distributed among the economy by conducting a survey of formal-informal price dispersions. By drawing on additional local measures of the size of the informal economy, I will assess whether and how there are “tipping points” in the (local) transition from an informal to a formal organization of the economy. In the last part of the project, I will exploit a natural experiment radically changing the availability of legal tax avoidance opportunities to assess how taxpayers perceive the costs of tax evasion by observing individual substitution patterns between costly real responses (possibly evasion) and less costly use of avoidance opportunities.

• DFG Programme: WBP Fellowship
• International Connection: Ecuador, USA
• Hosts: Maria Eugenia Andrade; Professor Joel Slemrod, Ph.D.