Tax Design-Tax Evasion Relationship in Serbia: New Empirical Approach to Standard Theoretical Model
Abstract
This paper provides evidence on the impact of the change in income tax rates and the degree of its progressivity on the scale of labour taxes evasion in Serbia, using the tax-benefit microsimulation model and econometric methods, on 2007 Living Standard Measurement Survey data. The empirical analysis is based on novel assumption that individual’s tax evasion decision depends on a change in disposable income, which is captured by the variation in their Effective Marginal Tax Rates (EMTR), rather than on a change in after-tax income. The results suggest that the elasticity of tax evasion to EMTR equals -0.3, confirming the Yitzhaki's theory, while the propensity to evade is decreasing in the level of wages and increasing in the level of self-employment income. The results also show that introduction of revenue-neutral, progressive taxation of labour income would lead to increase in labour tax evasion by 1 percentage point.
References
Allingham, G., & Sandmo, A. (1972) Income tax Evasion: a theoretical analysis. Journal of Public Economics, (1). 323-338.
Alm, J., Jackson, B., & McKee, M. (1992). Estimating the determinants of taxpayer compliance with experimental data. National Tax Journal, 45(1). 107-114.
Arandarenko, M., & Vukojevic, V. (2008). Labor costs and labor taxes in the Western Balkans. Mimeo. Washington, DC: World Bank
Bernasconi, M., & Zanardi, A. (2004). Tax evasion, tax rates and reference dependence. FinanzArchiv, 60(4), 422–445.
Boylan, S., & Sprinkle, G. (2001). Experimental evidence on the relation between tax rates and compliance: the effect of earned vs. endowed income. The Journal of the American Taxation Association, 23(1), 75-90.
Clotfelter, C. (1983). Tax evasion and tax rates: an analysis of individual returns. The Review of Economics and Statistics, 65(3), 363-373.
Feinstein. J. S. (1991). An econometric analysis of income tax evasion and its deteclion. RAND Journal of Economics, 22, 14-35.
Gerxhani, K., & Schram, A. (2006). Tax evasion and income source: a comparative experimental study. Journal of Economic Psychology, 27(3), 402–422.
Graetz, M., & Wilde, L. (1985). The Economics of Tax Compliance: Fact and Fantasy. National Tax Journal (September), 345-363.
Hyndriks, J. & Myles, G. (2013). Intermediate Public Economics. MIT Press, Cambridge
Immervoll, H. (2004). Average and marginal effective tax rates facing workers in the EU. A micro-level analysis of levels, distributions and driving factors. OECD Working Paper No. 4/2004, OECD, Paris
Keen, M., Yitae, K., & Varsano, R. (2008). The flat tax(es), principles and evidence. International Tax and Public Finance, (15), 712-751.
Krstić, G., & Sanfey, P. (2011). Earnings inequality and informal economy: evidence from Serbia. Economics of Transition, 19(1), 179–199.
Krstić, G., Schneider, F., Arsić, M., Arandarenko, M., Radulović, B., Ranđelović, S., & Janković, I. (2013). Shadow economy in Serbia: new findings and recommendations for reform. USAID and FREN Study (available at:
Koettl, J. (2010, December). Do formal jobs pay in the Western Balkans? The role of labour taxes and social benefits in creating formal jobs. The paper presented at the World Bank's conference Poverty and Inclusion in Western Balkans, Brussels.
Pommerehne, W., & Weck-Hannemann, H. (1996). Tax rates, tax administration and income tax evasion in Switzerland. Public Choice, 88: 161-170.
Randjelovic, S., & Zarkovic-Rakic, J. (2011). Addressing inequality and poverty with tax instruments. Economic Annals, 54(19), 7-26.
Randjelovic, S., & Zarkovic-Rakic, J. (2013). Improving working incentives: evaluation of tax policy reform using SRMOD. International Journal of Microsimulation, 6(1), 157-176.
Sandmo, A. (2005). The theory of tax evasion: a retrospective view. National Tax Journal, Vol. LVII(4), 643-663.
Schneider, F., & Enste, D. (2000). Shadow economies: size, causes and consequences. Journal of Economic Literature, XXXVIII: 77-114.
Yaniv, G. (2009). The tax compliance demand Curve: a diagramatical Approach to income tax evasion. Journal of Economic Education, 40(2), 213-224.
Yitzhaki, S. (1974). A note on income tax evasion: a theoretical analysis. Journal of Public Economics, (3), 201-202.
Witte, A. D., & Woodbury, D. F. (1985). The effect of tax laws and tax administration on tax compliance. National Tax Journal, 38(1). 1–13.