The aggregate consequences of tax evasion

Abstract

There is a sizable overall tax gap in the U.S., albeit tax non-compliance diers sharply across income types. While only small percentages of wages and salaries are underreported, the estimated misreporting rate of self-employment business income is substantial. This paper studies how tax evasion in the self-employment sector affects aggregate outcomes and welfare. We develop a dynamic general equilibrium model with incomplete markets in which heterogeneous agents choose between being a worker or self-employed. Self-employed agents may hide a share of their business income but face the risk of being detected by the tax authority. Our model replicates important quantitative features of the U.S. economy in terms of income, wealth, selfemployment, and tax evasion. Our quantitative ndings suggest that tax evasion leads to a larger self-employment sector but it depresses the average size and productivity of self-employed businesses. Tax evasion generates positive aggregate welfare eects because it acts as a subsidy for the self-employed. Workers, however, suer from substantial welfare losses.

Consumer payment choice and the heterogeneous impact of India’s demonetization

“…As mentioned earlier, Gomis-Porqueras et al ( 2014) also explores the endogenous emergence of a shadow economy but with exogenous tax enforcement. Di Nola et al (2018) finds that income tax evasion leads to a larger self employment sector but reduces their productivity by calibrating their heterogeneous agent, incomplete markets model to US data. Other papers on shadow economy includes Koreshkova (2006) which focuses on inflation as tax on underground economy, Camera (2001) takes a search-theoretic approach and Schneider and Enste (2000) provides a summary.…”

An Econometric Analysis of Tax Evasion and Its Consequences on Economic Performance

“…It applied the (CDA) and (MIMIC) methodologies. Finally, the study of DiNola et al [18] dealt with the overall consequences of tax evasion.…”

Industrial structure and evasion dynamics, is there any link?

“…Similar results are found by Bobbio (2016), based on data published by the Italian Revenue Agency: the probability of being controlled for big firms (with turnover exceeding 100 million euros and about 300 employees) in 2015 was 39%, against 2% for small and sole proprietorship firms. In the U.S., Di Nola et al (2021), based on data from Slemrod and Gillitzer (2014, Chapter 6.5), and the U.S. Department of the Treasury (2011), report how small corporations, with less than 10 million dollars in total assets, are audited with only 1% probability, whereas larger corporations, with more 10 million dollars in total assets, face an audit rate of 17.6%. Less developed economies make no exception, and it is often argued that tax administrations in low‐income countries target larger firms more intensively because tax collection is expected to be greater than enforcement costs (Gauthier & Gersovitz, 1997; Gauthier & Reinikka, 2006; Goyette & Gallipoli, 2015).…”