The Aggregate Consequences of Tax Evasion

There is a sizable overall tax gap in the U.S., albeit tax non-compliance differs 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, self-employment, 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 effects because it acts as a subsidy for the self-employed. Workers, however, suffer from substantial welfare losses.

Subject (DDC)

330 Economics

Keywords

Tax evasion, Self-employment, Wealth inequality, Tax policy

Cite This

ISO 690

DI NOLA, Alessandro, Georgi KOCHARKOV, Almuth SCHOLL, Anna-Mariia TKHIR, 2018. The Aggregate Consequences of Tax Evasion

BibTex

@techreport{DiNola2018Aggre-47867,
  year={2018},
  series={Working Paper Series / Department of Economics},
  title={The Aggregate Consequences of Tax Evasion},
  number={2018-06},
  url={https://ideas.repec.org/p/knz/dpteco/1806.html},
  author={Di Nola, Alessandro and Kocharkov, Georgi and Scholl, Almuth and Tkhir, Anna-Mariia}
}

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    <dcterms:abstract xml:lang="eng">There is a sizable overall tax gap in the U.S., albeit tax non-compliance differs 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, self-employment, 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 effects because it acts as a subsidy for the self-employed. Workers, however, suffer from substantial welfare losses.</dcterms:abstract>
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URL of original publication

https://ideas.repec.org/p/knz/dpteco/1806.html

Test date of URL

2019-12-06

Bibliography of Konstanz

Yes