Tax compliance: when do employees behave like the self-employed?

Abstract

Previous studies of the underreporting of income for tax purposes have used private employees as the benchmark to which other groups' compliance was measured. In this paper it is suggested that there are a number of circumstances when there will be an incentive for private employees and their employers to collude to understate employee wages and salaries for purposes of taxation. The existence of high marginal tax rates of income tax combined with high social security payroll taxes are the typical conditions that stimulate this behaviour. These conditions are present in North Cyprus. This paper examines a rich source of household consumption expenditure and income data for North Cyprus that allows one to separate out the consumption expenditures made by the self-employed, private employees and civil servants over specific periods of time. From the comparison of consumption expenditures on food by these three groups it is possible to estimate how much self-employed and the private employees understated their incomes as compared to the civil servants. It is found that in North Cyprus private employees understate their incomes by approximately the same proportion of their incomes as do the self-employed.

Minimum wage and tax evasion: Theory and evidence

“…The methodology developed by Pissarides and Weber has also been used to study underreporting by private sector employees, using public sector employees as a control group assumed to correctly report income (Besim and Jenkins, 2005.) However, Gorodnichenko and Sabirianova (2006) take the opposite view in their study on bribery in Ukraine.…”

“…Large e¤orts have also been devoted to the theoretical and empirical study of tax evasion and the shadow economy 3 . The study of tax evasion by employed labour is of particular interest as the …scal imposition on labour in the form of social security contributions (SSC) and personal income tax (PIT) represents the bulk of …scal revenues in many countries 4 .…”

“…(own translation) 2 See Brown (1999) for a review. 3 See Andreoni et al (1998) or Slemrod and Yitzhaki (2002) for surveys on tax evasion and Schneider and Enste (2000) for a survey on the shadow economy. 4 In EU15 as a whole, labour taxes contributed around 50% of the total tax receipts in 2002 (Eurostat, 2004.…”

The distribution of UK personal income tax compliance costs

“…Rice, 2001;Hudson and Godwin, 2000) 1 , which bear heavier compliance costs than the self-employed and large firms (Besim and Jenkins, 2005). The only previous publication on personal taxpayer compliance costs in the UK is by Sandford et al, and predates self assessment (Sandford et al, 1989).…”

Market consumption and hidden consumption. A test for substitutability

“…8 See Schneider and Enste (2000) and the works quoted therein. A recent empirical investigation for North Cyprus (Besim and Jenkins, 2005) also estimates the size of the underreported income through data on the household consumption expenditure. 9 The ADF test for Private Consumption is À2.17 whereas, for the Underground Consumption data, the ADF statistic is À1.1348.…”