Measuring evasion and non-compliance

Republished from the Tax Justice Research Bulletin – find it all at TJN, with added Afrobeat.

With the systematic tax abuses revealed by #SwissLeaks dominating world headlines, and provoking a threatened tax strike in the UK, tax non-compliance is a hot topic. In the various related strands of literature, four main approaches to estimates or direct measures of scale can be identified. Each deals with evidence from a different stage of economic activity.

IRS net misreporting fig

The most important evidence base is that of tax authorities’ own assessments of actual compliance. The US Internal Revenue Service is probably the field leader, with periodic publications providing percentage estimates of the compliance rate in various tax categories. Underlying any overall ‘tax gap’ estimate are the critical variables, the ‘net misreporting percentage’. Of particular value in the IRS approach is that compliance in relation to particular income streams is broken down according to the amount of information on the income provided to the IRS by third parties – revealing the powerful deterrent effect of transparency, even where the likelihood of investigation is small. (That the most recent published figures relate to 2006 appears to reflect the success of ongoing political efforts to ‘starve’ the IRS.)
greek under-reporting 2012 fig1A second source of evidence lies in third-party estimates, and in particular those of banks in states where evasion is seen as endemic. As the new Greek government committed to crack down on evasion, a 2012 paper came back into the news for its publication of banks’ assessments for lending purposes of their clients’ income under-reporting. The accompanying chart shows the apparent correlation with wealth of lambda, the multiplier necessary to get from reported income to true income. (Uncounted, innit? Greater hidden incomes at the top end.)

The third type of evidence stems from the limited international data on declaration of offshore income streams. This is the data that lies, for example, behind Gabriel Zucman’s estimates of undeclared global assets in excess of $7 trillion (see section on ‘The fraction of offshore money that evades taxes’).

Finally, there are macroeconomic analyses of the ‘informal’ or ‘shadow’ economy, in which the work of Friedrich Schneider has been particularly influential. Although there is a sense that measures based on e.g. use of electricity may highlight small-scale economic activity rather more than top-end evasion, the availability of consistent cross-country measures does offer an opportunity – see e.g. what World Bank authors kindly referred to as the ‘Cobham approach’, or Richard Murphy’s European analysis.

By the way – TJN curates some of the main ‘big numbers’ in this area here – and we’re always happy to hear of others we should include.

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