Thursday, November 6, 2014

Cheating on taxes might not be that bad after all.

Do you hate taxes? The classical tax argument was skewed towards government provision of pure public and nonexclusive goods. We’d rather the government supplies those goods because they are so normative in character. There are other normatives, like the sin tax, which focus on behavioral changes. If tax evasions were allowed, would it be to our best interests? Is it ever justified to cheat on taxes? Policy makers might see some benefits in allowing tax evasion. Sometimes, no loophole is left unturned. Whatever the case, tax evasion has implications for societal welfare and for the burden bearers.

Taxes are like double-edged swords. Niedziella. Flickr.
There are several kinds of taxes. Sales taxes, value added taxes, income taxes, corporate taxes… When evasion opportunities exist, the burden of taxes is lesser. Wrong, you might say?

Well, in a discussion paper, tax incidence in the presence of tax evasion, Phillip Doerrenberg and Denvil Duncan carried out some economic experiment with respect to sales taxes using double auction markets. They concluded that access to tax evasion opportunities reduces the effectiveness of taxes which aim was to change some behavior of the market participants. But on the other hand, tax evasion opportunities and the use of those opportunities might not do the society any harm if those taxes were not critical to…national income; only money changing hands from government’s into some citizens’ coffers.

The target of the experiment were sales taxes. It was discovered that evading sales taxes has three effects:
  • It lowers the prices of goods and services in the market.

  • The prices of goods for sellers who were evading taxes were lower than for those sellers who thought that tax evasion was not justified. The burden of taxes the dishonest salesmen shifted to buyers were lower than for the honest salesmen. This suggests that sales taxes may be more or less regressive in character.

  • Sellers who evade taxes sell more goods than those who were honest.

  • Maybe honesty doesn’t pay. Dishonest sellers sold more than their honest counterparts. But we cannot all afford to be dishonest. There are potential efficiency gains which policy makers can derive by turning a blind eye or making a room for tax evasion.

  • Those who did not evade taxes remitted more money than those who did.

  • It depends on the tax in question. Some taxes do not make any dots on the GDP map. Policy makers can turn a blind eye to them. Otherwise, they can implement evasion reducing strategies like taxing goods with higher evasion opportunities more so as to reduce their demand thereby increasing government revenues and reducing resource costs associated with bringing tax evaders to book.

Love them or hate them, taxes are a double-edged sword.
The full article is online: Tax incidence in the presence of tax evasion.

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