The political economics of not paying taxes

We provide a formal model illustrating the mutual relationship between corruption and capital account restrictions. Corrupt countries are more likely to impose capital controls because corruption reduces a government's ability to collect tax revenue. If controls exist, however, individuals try to mitigate the burden by offering bribes, thereby increasing corruption. We test the model using panel data for 80 countries over the period [1984][1985][1986][1987][1988][1989][1990][1991][1992][1993][1994][1995][1996][1997][1998][1999][2000][2001][2002] and find that corruption and restrictions indeed affect each other. Government's attempts to increase revenue via controls on capital might thus invoke a restrictions-rent-seeking spiral with destructively high levels of both. Using capital controls to increase revenue should be reconsidered.

Section: Data and Econometric Approachmentioning

confidence: 99%

The nexus between corruption and capital account restrictions

Dreher

Siemers

2009

“…Moreover, note that the expected utility approach of tax evasion seems to have low explanatory power (see e.g., Frey and Feld 2002;Andreoni et al 1998). 6 The empirical literature suggests that (illegal) evasion and (legal) avoidance responses to taxation are quite big-at least in comparison with rather small changes in labour supply (compare e.g., Feldstein 1995, as well as the discussion in Kopczuk 2001;Roine 2006). We therefore leave the analysis of endogenous labour supply within this framework for future research.…”

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confidence: 99%

“…Evasion is modeled along the lines of Allingham and Sandmo (1972) and tax revenues are used to finance a lump-sum transfer. Roine (2006) studies a model of majority voting on taxes in the presence of legal tax avoidance. Agents make a discrete choice, either to invest a fixed amount and explore a given avoidance opportunity or to declare all their income.…”

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confidence: 99%

Voting over taxes: the case of tax evasion

Traxler

2009

This paper studies majority voting on taxes when tax evasion is possible. We characterize the voting equilibrium where the agent with median taxed income is pivotal. Since the ranking of true incomes does not necessarily correspond to the ranking of taxed incomes, the decisive voter can differ from the median income receiver. In this case, we find unconventional patterns of redistribution, e.g., from the middle class to the poor and the rich.

“…Our work also relates to the literature analyzing the effects of tax avoidance on income redistribution and the efficiency properties of majority voting outcomes over a linear income tax schedule, see Roine (2006) and Traxler (2012).…”

Section: Introductionmentioning

confidence: 98%

“…Regarding the costs of taxation, Evans (2003) notes that taxpayers's compliance costs are typically somewhere between 2% and 10% of total revenue while administrative costs are around 1% of total revenue. 2 Besides the economic significance, the relevance of tax avoidance for the political problem has recently been emphasized by Roine (2006) and Traxler (2012). 3 Specifically, when it comes to redistributive taxation, the presence of tax avoidance may not only give rise to atypical coalitions supporting higher taxes ('ends against the middle') but it will also affect the welfare properties of the voting outcome.…”

Section: Introductionmentioning

confidence: 99%

The political economics of redistribution, inequality and tax avoidance

Bethencourt

Kunze

2015

A benchmark result in the political economy of taxation is that the degree of redistribution is positively linked to income inequality. However, empirical evidence supporting such a relationship turns out to be mixed. This paper shows how these different empirical reactions can be rationalized within a simple model of tax avoidance and costly tax enforcement. By focussing on structure induced equilibria in which taxpayers vote over the size of the income tax and the level of tax enforcement, we show that higher inequality may well decrease the extent of redistribution, depending on two opposing effects: the standard political effect and a negative tax base effect working through increases in the average level of tax avoidance and the share of enforcement expenditures in total tax revenue.