Tax Evasion and Inequality
by Annette Alstadsaeter, Niels Johannesen and Gabriel Zucman (UC Berkeley), Oct 6, 2017, 59 pp
The size and distribution of tax evasion is a source of sustained interest and controversy among
the public. Some believe that the bulk of tax evasion is done by the wealthy, a view fueled recently by high-profile leaks from offshore financial institutions such as the Panama Papers.
Others stress that poorer individuals may be more likely to evade taxes, highlighting fraud by
the self-employed or abuse of refundable tax credits.
Who evades taxes—and how much—matters for both economists and policy-makers. First,
and most importantly, it matters for the study of inequality. Over the last fifteen years, scholars
have increasingly relied on tax data to study distributional issues, especially trends in top income and wealth shares (see Roine and Waldenstr ?om, 2015, for a recent survey). This raises
an obvious issue: since tax rates, tax evasion technologies, and tax enforcement strategies differ
across countries and have changed dramatically over time, tax data may paint a distorted
picture of the cross-country and time-series patterns in inequality. Second, tax evasion matters
for analyzing the effects of governments intervention in the economy; it redistributes the tax
burden and affects the costs of raising taxes, “bread-and-butter concerns of public economics”
(Slemrod, 2017). Last, knowing how tax evasion is distributed would help tax authorities—
which face tight budget constraints—to better target their enforcement effort.
Tax evasion is fundamentally hard to study because there is no single source of information
capturing all of it…