Essays in income tax evasion
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Date
2022
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Abstract
Governments recurrently come back to ask the best way to increase tax collection, based on constant necessities to increase its spending. Generally, increasing tax collection is associated with a tax raise, mainly motivated by the agent’s mechanical responses, i.e., assuming that taxpayers do not adjust their taxable income. However, the behavioral response (the adjustment in the agent’s taxable income, for instance) produces a variety of consequences in different markets. Indeed, a rise in taxes changes the evasion’s gains altering the incentives to participate in occupations with higher evasion facilities. This thesis is devoted to studying this issue throughout two chapters. Each of these chapters inquires over the consequences of the tax policy in contexts where tax evasion and occupational decision coexist.
The first chapter studies the causal effect of income tax evasion on self-employment decisions. We develop a theoretical model to disentangle the mechanisms behind this effect when the marginal tax rate changes. Then, we obtain a proxy of tax evasion using a consumption-based approach at the household level using data for Chile. To identify the causal effect of income tax evasion, we use two advantages from the Chilean setting. First, it establishes equal marginal tax rates across self-employed and wage-earners isolating the evasion channel. Secondly, we exploit a marginal tax reform that affects agents given their pre-reform taxable income. We obtain two behavioral parameters using a difference-in-difference approach. Firstly, the elasticity of evasion to marginal tax rate equals 1.4. Also, we find that an increase of 1 percentage point in the evasion rate raises the probability of being self-employed by 6.1 percentage points, with a semi-elasticity of 0.16. We also show that the evasion channel explains 99.73% of the effect of taxes on self-employment decisions. Finally, we document that the deadweight loss associated with the tax reform is between 2.82 - 3.01% depending on the tax compliance policy. Moreover, we theoretically and empirically demonstrate that not considering evasion in this measure produces a biased estimation of the tax effect on welfare. The second chapter incorporates occupational decisions into the hierarchical model of Sanchez and Sobel (1993) to investigate distortions in tax policies design: the audit function, a linear marginal tax rate, and the IRS budget. In this economy, evasion is only possible in the self employment sector. The optimal audit is efficient below a cut-off level, and above this level, are equal to zero. This result is held under two extensions: the audit cost is monotonically nondecreasing in the self-employment wage, and the fine rate rises in self-employment wage but is bounded from above. The marginal tax rate is smaller than one, indicating that not considering occupational decisions produces an upward bias on taxes. The optimal IRS budget does not allow auditing the entire self-employment sector, but it is larger than the result from a cost-benefit analysis. Finally, differential taxation is optimal if the marginal tax rate in the self-employment sector is higher than the dependent sector. This result produces that the distortions in the optimal allocation of agents increase compared to an environment with one marginal tax rate.
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Tesis (Doctorado en Economía)--Pontificia Universidad Católica de Chile, 2022