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Understanding tax evasion : combining the public choice and new institutionalist perspectives
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Elodie DOUARIN and Oleh HAVRYLYSHYN (eds), The Palgrave Handbook of Comparative Economics, Cham : Palgrave Macmillan, 2021, pp. 785-810
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GËRXHANI, Klarita, WINTROBE, Ronald, Understanding tax evasion : combining the public choice and new institutionalist perspectives, in Elodie DOUARIN and Oleh HAVRYLYSHYN (eds), The Palgrave Handbook of Comparative Economics, Cham : Palgrave Macmillan, 2021, pp. 785-810 - https://hdl.handle.net/1814/70515
Abstract
In the economic theory of tax evasion, individuals and corporations pay taxes only because they are forced to (i.e., because they believe that if they do not, they would be liable to prosecution by the state). If this were the case, it would be essential that the probability of being discovered for tax evading and the size of the penalty if caught and convicted are sufficiently large to deter evasion. One problem with this standard view is that for some taxes, such as self-reported income taxes, it is hard to believe that the probability of being caught for evasion is very large. In fact, all countries do encounter tax evasion, even those with the most sophisticated systems for gaining compliance. To illustrate, the United States Internal Revenue Service (IRS) estimates that the proportion of all individual tax returns that are audited was 0.5% in 2017 (down from 0.8% in 1990 and 4.75% in 1965). Civil penalties can add an additional 85% to the underpayment, depending on whether there is a specific misconduct such as negligence, substantial understatement, or substantial intentional wrongdoing. In very serious cases, criminal penalties may be applied. However, the penalties imposed are either small or infrequent (Alm 2019). Yet, the IRS estimates that, for the tax year 2015, 90.8% of income that should have been reported was in fact reported.