Why Pay Taxes When No One Else Does? In this paper we try to understand the phenomena whereby a large proportion of the population evades tax payments. We present a model which incorporates elements from the theory of information cascades with the standard model of tax evasion and analyze the connection between the decision of a potential tax evader, the number of tax evaders and the number cau...

We show that an increase in uncertainty about the probability of being audited (ambiguity) increases tax compliance for ambiguity-averse taxpayers but reduces compliance for ambiguity lovers. Because experimental evidence reveals considerable heterogeneity with respect to ambiguity preferences, we conclude that fostering uncertainty about the probability of being audited may not be an effective...

Investments in fiscal capacity—economic institutions for tax compliance—are an important feature of economic development. This paper develops a dynamic model to study the evolution of over time. We contrast a social planner’s investment path with politically feasible paths. Three types of states emerge in the long run: a commoninterest state where public resources are devoted to public goods, a...

We consider corporate tax evasion as a decision a¤ecting business partners. There are costs of uncoordinated tax reports, both in terms of catching inspectors’attention and running accounts. If these costs are small, there exist a unique Nash equilibrium of the game between the tax authority and a population of heterogenous …rms. In this equilibrium, the miscoordination costs enhance non-compli...

This paper empirically assesses the incidence and efficiency of Round I of the federal urban Empowerment Zone (EZ ) program using confidential microdata from the Decennial Census and the Longitudinal Business Database. Using rejected and future applicants to the EZ program as controls, we find that EZ designation substantially increased employment in zone neighborhoods and generated wage increa...

This paper investigates multi-item moral hazard with auditing contests. Although the presented model is widely applicable, we choose tax evasion as an exemplary application. We introduce a tax-evasion model where tax authority and taxpayer invest in detection and concealment. The taxpayers have multiple potential income sources and are heterogeneous with respect to their evasion scruples. The t...

Our survey of private manufacturing firms finds the size of hidden “unofficial” activity to be much larger in Russia and Ukraine than in Poland, Slovakia and Romania. A comparison of cross-country averages shows that managers in Russia and Ukraine face higher effective tax rates, worse bureaucratic corruption, greater incidence of mafia protection, and have less faith in the court system. Our f...

The relationship between corruption and economic development is characterised by three stylised facts: (i) a strong negative correlation between corruption and development (ii) countries can remain trapped in high corruption-low development or low corruption-high development equilibria (iii) amongst intermediate levels of development corruption levels are more variable, some countries have high...

Tax Morale and Compliance Behavior: First Evidence on a Causal Link Recent literature on tax evasion emphasizes the importance of moral considerations to explain compliance behavior. As a consequence scholars aim to identify factors that shape this so-called tax morale. However, the causal link between tax morale and actual compliance behavior is not established yet. Exploiting exogenous variat...

Reducing tax evasion is a priority for many governments. A growing literature argues that verifying taxpayer reports against third-party information is critical for tax collection. However, effectiveness can be limited when tax authorities face constraints to credible enforcement and taxpayers make offsetting adjustments on other margins. We exploit a policy intervention in which Ecuadorian fir...