Tax Evasion, Information Reporting, and the Regressive Bias Hypothesis

TY - UNPB

T1 - Tax Evasion, Information Reporting, and the Regressive Bias Hypothesis

AU - Boserup, Simon Halphen

AU - Pinje, Jori Veng

N1 - JEL classification: D82, H26, K42

PY - 2010

Y1 - 2010

N2 - A robust prediction from the tax evasion literature is that optimal auditing induces a regressive bias in effective tax rates compared to statutory rates. If correct, this will have important distributional consequences. Nevertheless, the regressive bias hypothesis has never been tested empirically. Using a unique data set, we provide evidence in favor of the regressive bias prediction but only when controlling for the tax agency's use of third-party information in predicting true incomes. In aggregate data, the regressive bias vanishes because of the systematic use of third-party information. These results are obtained both in simple reduced-form regressions and in a data-calibrated state-of-the-art model.

AB - A robust prediction from the tax evasion literature is that optimal auditing induces a regressive bias in effective tax rates compared to statutory rates. If correct, this will have important distributional consequences. Nevertheless, the regressive bias hypothesis has never been tested empirically. Using a unique data set, we provide evidence in favor of the regressive bias prediction but only when controlling for the tax agency's use of third-party information in predicting true incomes. In aggregate data, the regressive bias vanishes because of the systematic use of third-party information. These results are obtained both in simple reduced-form regressions and in a data-calibrated state-of-the-art model.

M3 - Working paper

BT - Tax Evasion, Information Reporting, and the Regressive Bias Hypothesis

PB - Economic Policy Research Network, Department of Economics, University of Copenhagen

ER -