Tax Evasion and Enforcement Spillovers: Distributional Implications for Developing Economies
Final Report Abstract
This document provides a short summary of my research agenda during a research visit as a Visiting Research Scholar at the Ross School of Business within the University of Michigan in Ann Arbor, USA, funded by the Walter Benjamin Programme of the German Science Foundation. The overarching objective of my research agenda was to advance the literatures in public and development economics by analyzing how to curb tax evasion and increase participation in the formal economy. A particular emphasis was put on the analysis of settings with low formalization, that is economies or sectors in which a large share of the economic activity takes place outside of the formal tax and transfer system. Moreover, the project aimed to identify spillover effects of micro-oriented tax policies in which a particular reform affected various outcome margins. Additionally, the agenda set out to measure the distributional impacts of tax evasion to provide an answer to the question who benefits from evading a given tax. This project drew on a wide variety of methods in empirical research, ranging from triple difference-in-differences analyzing a natural experiment arising from a comprehensive reform, to the use of experiments and innovative surveys. A special focus was put on identifying and analyzing specific reforms enacted in different settings. Since the original working plan was devised in 2019 just before the onset of the worldwide covid-19 pandemic, some of the originally planned activities could not be carried out as envisaged, and had to be re-calibrated. In two projects I switched the planned activities to different countries and settings, while maintaining the same underlying research objectives. In a first project, I studied the spillover effects of granting extensive deduction possibilities to personal income tax payers, and measured how this induced businesses to report more profits to the tax authority. Together with my coauthor Jan Nimczik, we found strong effects on the reported profits of self-employed business owners, the VAT liability of firms, and conducted a net revenue impact analysis. Overall, the reform had positive effects on the tax revenue of the government. The second project aimed at measuring the distributional impacts of tax evasion, in particular by providing quantifiable measures for how evaded taxes are transferred throughout the economy via prices. The original plan was to conduct an experiment in Ecuador, which however became impossible due to the covid-19 pandemic. In response to this I teamed up with my coauthors Giacomo Brusco (University of Tübingen) and Leonardo Giuffrida (ZEW Mannheim) to plan and conduct a similar experiment in Italy. We have finalized the planning stage of the project and will soon field the survey in Italy, aiming at measuring the incidence of evasion among restaurants. The third project aims to exploit a natural experiment to measure the extent of tax evasion and how evasion behavior reacts to reforms curtailing such possibilities. The originally planned setting was also to analyze a reform in Ecuador, however, due to increased difficulties to access administrative data during and post-covid, I found a different setting to answer a very comparable research question. The new project is joint work with Antonios Koumpias (University of Michigan-Dearborn) and Annalisa Tassi (University of Erlangen-Nürnberg). The ongoing project measures in how far the Reverse Charge Mechanism (RCM) implemented by many countries in the European Union at different points in time and to differing degrees was successful in curtailing VAT evasion. During my research stay at the University of Michigan, we laid the crucial groundwork for gathering the necessary data and institutional information, and setting up our empirical research approach. We are currently revising the paper.
