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No government can announce a tax system and then rely on taxpayers' sense of duty to remit what is owed. Some dutiful people will undoubtedly pay what they owe, but many others will not. Over time the ranks of the dutiful will shrink, as they see how they are being taken advantage of by the others. Thus, paying taxes must be made a legal responsibility of citizens, with penalties attendant on noncompliance. But even in the face of those penalties, substantial tax evasion exists. Tax evasion is widespread, always has been, and probably always will be. This essay reviews what is known about the magnitude, nature, and determinants of tax evasion, with an emphasis on the U.S. income tax. It then places this information into a conceptual context, examining various models and theories, and considers policy implications.

We improve upon the Pissarides-Weber method for estimating tax evasion among the self-employed by utilizing unique register-based consumption measures from the Swedish and Finnish mandatory registers for pleasure boats. This allows for more detailed and statistically powered analyses than survey-based applications. Our results indicate overall levels of hidden incomes that are in line with previous studies. However, the functional form analysis shows that the estimated sizes of underreporting in absolute monetary amounts are almost constant over reported income levels, whereas previous studies have assumed that the underreporting is proportional to income. The results from the preference analysis—in which we compare households that will become self-employed in the near future with households that will remain wage earners—are mixed; the two types of households have insignificant (Finland) or economically small (Sweden) preference differences. However, when we use engine power as a price proxy, the preference differences are larger in both countries.Plain English SummaryConsumption of pleasure boats reveal tax evasion by the self-employed. We find that self-employed households are substantially more likely to own a pleasure boat than employee households, holding income constant, indicating income underreporting. Households that become self-employed in the near future, however, are only marginally more likely to own a boat. This suggests that differences in boat ownership are not mainly due to preference differences. We also find that underreporting is relatively constant in absolute monetary terms over the reported income distribution. Policy implications from this are (a) that the case for subsidizing entrepreneurship using public funds is weakened, as we can be more confident that actual self-employment income is higher than reported income and (b) that the income of self-employed with low household incomes may be considerably higher than reported, meaning that that the actual income distribution is less unequal compared to the reported income distribution.

PurposeTax noncompliance is increasingly becoming a global challenge, and numerous occurrences indicate that economies in sub-Saharan Africa are the greatest hit. In Ghana, only a few people pay direct taxes. The construction sector is critical for paying taxes, but many indigenous contractors usually fail to honor their tax obligations, which ultimately affects their business success. This study examines the link between indigenous contractors’ tax compliance and their business growth (BG).Design/methodology/approachWe adopt a quantitative approach and cross-sectional survey design to collect data from construction firms’ employees. We utilize descriptive statistics and hierarchical regression modeling to analyze the data.FindingsWe discover that indigenous contractors’ tax compliance is above average. Prospects, profit, market share and survival are identified as indicators of BG for construction firms. Furthermore, tax compliance and BG indicators were significantly positively related. However, tax compliance has a stronger effect on BG – prospects than other indicators. We also establish that contractors’ educational level can increase the effect of tax compliance on BG indicators, except that it might not be substantial.Originality/valueThis study provides empirical evidence that businesses, particularly contractors, with higher tax compliance are more likely to exhibit positive business outcomes and vice versa. This study has important implications for policymakers, business owners and stakeholders, as it highlights the importance of tax compliance in supporting business success. Tax administrators can rely on this study to educate indigenous taxpayers on the value of tax compliance, specifically highlighting how it can benefit their businesses.

Contrary to common expectations, legal enforcement may increase subsequent corporate misbehavior. Using Internal Revenue Service and financial statement data, we find that corporations gradually increase their tax aggressiveness for a few years following an audit and then reduce it sharply. We show that this U-shaped impact is consistent with strategic responses on the part of firms and with Bayesian updating of audit risk. This adverse effect on corporate behavior calls for a reexamination of both the theory and policy of legal enforcement.

The purpose of this study is to determine the factors affecting Tax professionals’ tax noncompliant behavior by using interpretive structural modelling method. Based on a comprehensive literature review and on the perception of 30 Tax professionals in Iran, five factors were identified to explain the Tax professionals’ tax noncompliant behavior: age, gender, tax knowledge, legislative tax complexity, and compliance tax complexity. The results of the interpretive structural modelling method showed that age and gender were the most influencing factors in the field of Tax professionals’ tax noncompliant behavior.

When upstream suppliers are VAT-exempted, overclaiming by fictional invoices becomes easier. This paper examines the effect of the presumed input VAT deduction reform on VAT evasion among VAT-exempted transactions in China. In the reform, firms are required to claim the presumed input refund of VAT based on downstream sales volume instead of on purchasing cost recorded on self-issued purchased invoices. We find that the reform reduced firms’ VAT evasion since taxpayers have little incentive to use spurious invoices. Furthermore, the reform demonstrated more pronounced policy effects when taxpayers are low in tax-compliance and local economy contains a higher share of tax-noncompliant firms with poor accounting records. Results survive a battery of robustness checks as well as treatment effect heterogeneity. The presumed input VAT method would be a complementary tax enforcement tool to avoid VAT evasion in low tax capacity and high-informality settings under the context of credit-invoice VAT collection system.

This article estimates the degree of tax noncompliance using evidence from unaudited tax returns. Measurements of noncompliance are derived from the relationship between reported charitable contributions and reported income from wages and salary as compared to alternative reported income sources such as self-employment, farm and other small business income. Assuming that the source of one's income is unrelated to one's charitable inclinations and that the ratio of true income to taxable income does not vary by income source, any difference in the relationship between charitable contributions and the source of income can be attributed to (relative) underreporting by the individual. We find that the implied amount of noncompliance is significant and that it varies by source of income, as well as between positive and negative values of each type of income.

Medical noncompliance is a major public-health problem. One potential source of this noncompliance is patient inertia. It has been hypothesized that one cause of patient inertia might be the status quo bias—which is the tendency to select the default choice among a set of options. To test this hypothesis, we created a laboratory analogue of the decision context that frequently occurs in situations involving patient inertia, and we examined whether participants would stay with a default option even when it was clearly inferior to other available options. Specifically, in Studies 1 and 2, participants were given the option to reduce their anxiety while waiting for an electric shock. When doing nothing was the status quo option, participants frequently did not select the option that would reduce their anxiety. In Study 3, we demonstrated a simple way to overcome status quo bias in a context relevant to patient inertia.

The problem of tax compliance is as old as taxes themselves. Characterizing and explaining the observed patterns of tax noncompliance, and ultimately finding ways to reduce it, are of obvious importance to nations around the world. The economics of tax compliance can be approached from many perspectives: it can be viewed as a problem of public finance, law enforcement, organizational design, labor supply, or ethics, or a combination of all of these. Tax compliance can also be linked to labor market behavior. The fact that occupations may vary in the degree of evasion possible, or that evasion is related to wages or tax brackets, may affect occupational choice, human capital investment, and labor supply. Studying tax compliance has raised some confounding behavioral issues. Economists are just beginning to grapple with the findings from other social sciences that could explain the observed compliance levels, such as a household's sense of moral or social obligation to pay its taxes.

PurposeThis study aims to investigate the reasons for the large scale tax noncompliance prevalent in underdeveloped countries despite many years of information technology (IT)-led tax administration reforms.Design/methodology/approachThe study is based on in-depth interviews with 18 senior tax administration officials. Their experiences were used to construct a grounded theory to explain the constraint of IT in tackling the prevalent tax noncompliance in underdeveloped countries.FindingsFirst, IT is not immune to the systemic corruption prevalent in many developing countries; hence, it is quickly compromised. Second, IT can be efficient in dealing with registered taxpayers but cannot deal with the overwhelming large numbers of operators in the informal sector. Third, E-tax administration, which is a hallmark of IT-led tax administrations in advanced countries, is very slow to catch up in developing countries. A computerized tax administration alone, as currently obtainable in developing countries, is not enough to engender large usage of e-filing. Businesses, especially small and medium-sized enterprises (SMEs), need IT infrastructure as well to align with tax administration. Unfortunately, basic IT infrastructure is yet to be available to a large section of SMEs in developing countries.Research limitations/implicationsUnderdeveloped countries are diverse. This study is from a single country and there may be need to take note of other countries’ peculiarities. However, Nigeria constitutes a good case study.Practical implicationsThere is need to reform the people and systems along with IT originality/value.Originality/valueTo the authors’ knowledge, this study is the first to explore this very important question and among the first to explore tax administrators’ perspectives.