Tax Evasion and Inequality

Abstract

This paper attempts to estimate the size and distribution of tax evasion in rich countries. We combine random audits-the key source used to study tax evasion so far-with new micro-data leaked from large offshore financial institutions-HSBC Switzerland ("Swiss leaks") and Mossack Fonseca ("Panama Papers")-matched to population-wide wealth records in Norway, Sweden, and Denmark. We find that tax evasion rises sharply with wealth, a phenomenon random audits fail to capture. On average about 3% of personal taxes are evaded in Scandinavia, but this figure rises to close to 30% in the top 0.01% of the wealth distribution, a group that includes households with more than $45 million in net wealth. A simple model of the supply of tax evasion services can explain why evasion rises steeply with wealth. Taking tax evasion into account increases the rise in inequality seen in tax data since the 1970s markedly, highlighting the need to move beyond tax data to capture income and wealth at the top, even in countries where tax compliance is generally high. We also find that after reducing tax evasion-by using tax amnesties-tax evaders do not legally avoid taxes more. This result suggests that fighting tax evasion can be an effective way to collect more tax revenue from the very wealthy.

Inequalities and the individualization of wealth

“…31 Wealth inequality is also likely to be affected by tax evasion (Alstadsaeter et al, 2019). However, this bias is common to both survey data and administrative data even though the bias may vary across data sources.…”

Tax evasion in new disguise? Examining tax havens' international bank deposits

“…Setting up a bank account offshore can be done online for a small fee (see Sharman, 2010, for some real-life examples). As offshore wealth is typically held by very wealthy individuals, such fees are negligible (Alstadsaeter et al, 2019). The most common way to transfer funds to that account is via an invoice for 'consulting services' carried out by the evader (see Zucman, 2013Zucman, , 2014.…”

Challenges in Measuring Poverty and Understanding its Dynamics: A South Asian Perspective

“…A matching of random audits of taxpayers in Denmark, Norway and Sweden with data on hidden assets leaked through the “Panama Papers” suggests that about 3 percent of personal incomes taxes are evaded even in highly‐advanced Scandinavian countries. And the share increases to 25–20 percent for the richest 0.01 percent of the population (Alstadsæter et al , ).…”