Both buyers and sellers of goods and services may bene.t from letting their economic transactions go unrecorded for tax purposes. The supplier reduces his tax burden by underreporting income, whereas the consumer gains from buying a non-taxed lower-priced product. The distributional implications of such joint tax evasion depend on the amounts evaded, on where the evaders on both sides of the market are found in the income distribution and how the financial gain is split between the suppliers and demanders. We use various data sources to identify tax evasion among sellers and buyers of goods and services. Results clearly suggest that the tax-evasion-controlled estimate of income inequality in Norway exhibits more income dispersion than official estimates.

Abstract:The partial revenue from each indirect tax and the total revenue from all indirect taxes on consumer goods are derived as functions of all commodity prices, the tax rates of each commodity, total expenditure and demographic variables using a complete demand system. Within this framework we define Dupuit curves, or Laffer curves, and analyze their existence and maximum points theoretically and empirically. The macro demand system is based on exact aggregation across all households in the economy, and on exact aggregation across commodities within a detailed non-homogeneous utility tree. An empirical application for Norway with 55 commodity groups is presented. For beer, wine, spirits and tobacco, consumers can choose among buying at home, cross-border shopping/ tax-free shopping and smuggling. These substitution possibilities increase substantially the price elasticities for these goods. The partial revenue from wine as function of the tax share on wine has a single maximum value close to the actual tax rate in Norway in 1999, conditioned on all the other exogenous variables. The total revenue as a function of the tax share on wine also has a single maximum value, larger than that for the partial revenue. The same results are valid for spirits. For beer and tobacco there is no revenue maximizing tax share.

A review of the theoretical literature on optimal indirect taxation reveals that analytical arguments in favor of uniform indirect taxation seem rather weak and unrealistic; hence determining the optimal tax structure remains an empirical issue. However, reviewing the empirical-computational studies published so far, shows that most of them operate under rather restrictive and simplistic frameworks. There is little computational support for uniformity, particularly when the models approach real world complexity. It appears that in a many-consumer economy, differentiated and progressive indirect taxation is likely to be the optimal solution.

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