Evidence of the invisible: toward a credibility revolution in the empirical analysis of tax evasion and the informal economy

Abstract

Empirical research about tax evasion and the informal economy has exploded in the past few decades, seeking to shed light on the magnitude and (especially policy) determinants of these phenomena. Quantitative information informs the analysis of policy choices, enables the testing of hypotheses about determinants of this phenomenon, and can help with the accurate construction of national income accounts. Even as empirical analysis has burgeoned, some have expressed doubts about the quality and usefulness of some prominent measures. The fact that high-quality data is elusive is neither surprising nor a coincidence. The defining characteristic of tax evasion and informal economic activity-that they are generally illegal-often renders unreliable standard data collection methods such as surveys. Unlike invisible phenomena in the natural sciences, these invisible social science phenomena are hard to measure because of choices made by individuals. Analysis of tax evasion and the informal economy must proceed even in the absence of the direct observability of key variables, and theory should guide the construction and interpretation of evidence of the "invisible." In this paper, we address what can be learned using micro or macro data regarding tax evasion and the informal economy under given conditions and assumptions, and critically review some of the most common empirical methods in light of our conclusions. We conclude with an entreaty for researchers in this field to enlist in the "credibility revolution" (Angrist and Pischke in J. Econ. Perspect. 4(2):3-30, 2010) in applied econometrics.

The effect of tax enforcement on tax elasticities: Evidence from charitable contributions in France

“…The sign of the elasticity of non-compliance behaviours with respect to the net-of-tax rate is theoretically ambiguous, not just because of income effects, but because the substitution effect can be either positive or negative, depending on the structure of penalties, taxes, and detection probabilities. Empirical studies give mixed results (for recent literature reviews, see Slemrod and Yitzhaki [2002], Slemrod and Stephan [2007], and Slemrod and Weber [2012]), that prove to be very sensitive to the empirical specification, due to the lack of exogenous variation in tax rates. One exception is the study of randomized audits in Denmark by Kleven et al [2011], which exploit kinks created by non-linear tax schedules to estimate the effect of the marginal tax rate on evasion.…”

One Size Does Not Fit All: A Field Experiment on the Drivers of Tax Compliance and Delivery Methods in Rwanda

“…Second, we estimate our equation with a tobit model, using the full sample. The tobit model is especially suited to censored data and it has been used in other studies in the tax experiments literature, for the same reason that motivates us to adopt it here (Slemrod and Weber 2012;Alm and McClellan 2012;Alm, Cherry, Jones and McKee 2010;Coricelli, Joffily, Montmarquette and Villeval 2007). However, it is particularly sensitive to deviations from the assumptions of normality of the error.…”

Measuring the Invisible: An Overview of and Outlook for Tax Non-Compliance Estimates and Measurement Methods for Switzerland

“…28 It is important to note that there is no unique definition of the tax gap and therefore, comparisons of measurement results must be made with caution, even Swiss Journal of Economics and Statistics, 2016, Vol. 152 (2) 29 Although in theory, the difference between tax non-compliance and tax avoidance is clear, the former is illegal and the latter is legal, in practice, as for example Slemrod and Weber (2012) point out, the distinction between the two is often blurred. 30 The audit program for the tax year 2006 rigorously checked more than 22,000 individual taxpayers and companies selected by a stratified random sampling process (SKAT, 2009a).…”