Do Higher Tax Rates Encourage/Discourage Tax Compliance?

DOI: 10.4236/me.2013.412086   PDF   HTML   XML   5,693 Downloads   8,633 Views   Citations


In this survey, we try to summarize what economists know about how increasing tax rate affects both tax evasion and the willingness to pay taxes. We show how this apparently trivial question presents puzzling results. This paper introduces the main contributions that have attempted to explain the apparent contradiction between the empirical evidence on the reaction of taxpayers to changes in tax rate levels and the results obtained by the standard models of tax evasion. In an effort to shed some light on this issue, the paper primarily concludes that there is more than enough room for further research on the relationship between tax evasion and tax rates given the many gaps in the literature concerning on this topic.


Share and Cite:

M. Freire-Serén and J. Panadés, "Do Higher Tax Rates Encourage/Discourage Tax Compliance?," Modern Economy, Vol. 4 No. 12, 2013, pp. 809-817. doi: 10.4236/me.2013.412086.

Conflicts of Interest

The authors declare no conflicts of interest.


[1] F. Schneider and D. H. Enste, “Shadow Economies: Size, Causes, and Consequences,” Journal of Economic Literature, Vol. 38, No. 1, 2000, pp. 77-114.
[2] M. Allingham and A. Sandmo, “Income Tax Evasion: A Theoretical Analysis,” Journal of Public Economics, Vol. 1, No. 3-4, 1972, pp. 323-338.
[3] S. Yitzhaki, “A Note on Income Tax Evasion: A Theoretical Analysis,” Journal of Public Economics, Vol. 3, No. 2, 1974, pp. 201-202.
[4] F. Schneider, “Shadow Economies around the World: What Do We Really Know?” European Journal of Political Economy, Vol. 21, No. 3, 2005, pp. 598-642.
[5] F. Schneider and D. H. Enste, “The Shadow Economy: An International Survey,” Cambridge University Press, Cambridge, 2002.
[6] J. Alm, “Measuring, Explaining, and Controlling Tax Evasion: Lessons from Theory, Experiments, and Field Studies,” Tulane Economics W. P. 1213, 2013.
[7] C. Clotfelter, “Tax Evasion and Tax Rates: An Analysis of Individual Returns,” Review of Economics and Statistics, Vol. 65, No. 3, 1983, pp. 363-373.
[8] S. Crane and F. Nourzad, “Time Value of Money and Income Tax Evasion under Risk-Averse Behavior: Theoretical Analysis and Empirical Evidence,” Public Finance/ Finances Publiques, Vol. 40, No. 3, 1985, pp. 381-393.
[9] S. Crane and F. Nourzad, “Inflation and Tax Evasion: An Empirical Analysis,” Review of Economics and Statistics, Vol. 68, No. 2, 1986, pp. 217-223.
[10] S. Crane and F. Nourzad, “On the Treatment of Income Tax Rates in Empirical Analysis of Tax Evasion,” Kyklos, Vol. 40, No. 3, 1987, pp. 338-348.
[11] J. Poterba, “Tax Evasion and Capital Gains Taxation,” American Economic Review, Vol. 77, No. 2, 1987, pp. 234-239.
[12] J. Alm, R. Bahl and M. Murray, “Tax Structure and Tax Compliance,” Review of Economics and Statistics, Vol. 72, No. 4, 1990, pp. 603-613.
[13] W. Pommerehne and H. Weck-Hannemann, “Tax Rates, Tax Administration and Income Tax Evasion in Switzerland,” Public Choice, Vol. 88, No. 1-2, 1996, pp. 161-170.
[14] O. Lang, K.-H. Nöhrbab and K. Stahl, “On Income Tax Avoidance: The Case of Germany,” Journal of Public Economics, Vol. 66, No. 2, 1997, pp. 327-347.
[15] D. Joulfaian and M. Rider, “Tax Evasion in the Presence of Negative Income Tax Rates,” National Tax Journal, Vol. 49, No. 4, 1996, pp. 553-570.
[16] J. Slemrod, “An Empirical Test for Tax Evasion,” Review of Economics and Statistics, Vol. 67, No. 2, 1985, pp. 232-238.
[17] J. Feinstein, “An Econometric Model of Income Tax Evasion and Its Detection,” RAND Journal of Economics, Vol. 22, No. 1, 1991, pp. 14-35.
[18] J. Alm, B. R. Jackson and M. McKee, “Estimating the Determinants of Taxpayer Compliance with Experimental Data,” National Tax Journal, Vol. 45, No. 1, 1992, pp. 107-114.
[19] H. J. Kleven, M. B. Knudsen, C. T. Kreiner, S. Pedersen, and E. Saez, “Unwilling or Unable to Cheat? Evidence from a Tax Audit Experiment in Denmark,” Econometrica, Vol. 79, No. 3, 2011, pp. 651-92.
[20] J. Alm, I. Sanchez and A. de Juan, “Economic and Noneconomic Factors in Tax Compliance,” Kyklos, Vol. 48, No. 1, 1995, pp. 3-18.
[21] P. J. Beck, J. S. Davis and W. Jung, “Experimental Evidence on Taxpayer Reporting Behaviour,” The Accounting Review, Vol. 66, No. 3, 1991, pp. 535-558.
[22] G. S. Iyer, P. M. J. Reckers and D. L. Sanders, “Increasing Tax Compliance in Washington State: A Field Experiment,” National Tax Journal, Vol. 63, No. 1, 2010, pp. 7-32.
[23] S. Yitzhaki, “The Relation between Return and Income,” The Quarterly Journal of Economics, Vol. 102, No. 1, 1987, pp. 77-95.
[24] H. Watson, “Tax Evasion and Labor Markets,” Journal of Public Economics, Vol. 27, No. 2, 1985, pp. 231-246.
[25] Y. H. Jung, A. Snow and G. A. Trandel, “Tax Evasion and the Size of the Underground Economy,” Journal of Public Economics, Vol. 54, No. 3, 1994, pp. 391-402.
[26] F. Cowell and J. Gordon, “Unwillingness to Pay. Tax Evasion and Public Good Provision,” Journal of Public Economics, Vol. 36, No. 3, 1988, pp. 305-321.
[27] J. Gordon, “Individual Morality and Reputation Costs as Deterrents to Tax Evasion,” European Economic Review, Vol. 33, No. 4, 1989, pp. 797-805.
[28] S. Klepper, D. Nagin and S. Spurr, “Tax Rates, Tax Compliance, and the Reporting of Long-Term Capital Gains,” Public Finance/Finances Publiques, Vol. 46, No. 2, 1991, pp. 236-251.
[29] J. Panadés, “Tax Evasion and Ricardian Equivalence,” European Journal of Political Economy, Vol. 17, No. 4, 2001, pp. 799-815.
[30] K. Lee, “Tax Evasion and Self-Insurance,” Journal of Public Economics, Vol. 81, No. 1, 2001, pp. 73-81.
[31] J. Panadés, “Tax Evasion and Relative Tax Contribution,” Public Finance Review, Vol. 32, No. 2, 2004, pp. 183-195.
[32] J. Caballe and J. Panadés, “On the Relation between Tax Rates and Evasion in a Multi-period Economy,” Hacienda Publica Espa?ola (Revista de Economía Pública), Vol. 183, No. 4, 2007, pp. 67-80.
[33] S. Dhami and A. al-Nowaihi, “Why Do People Pay Taxes? Prospect Theory versus Expected Utility Theory,” Journal of Economic Behavior and Organization, Vol. 64, No. 1, 2007, pp. 171-192.
[34] J. Slemrod, “Cheating Ourselves: The Economics of Tax Evasion,” Journal of Economic Perspectives, Vol. 21, No. 1, 2007, pp. 25-48.
[35] J. Slemrod and S. Yitzhaki, “Tax Avoidance, Evasion, and Administration,” In: A. J. Auerbach and M. Feldstein, Eds., Handbook of Public Economics, North Holland Publishers, 2002, pp. 1423-1470.
[36] Sandmo, “The Theory of Tax Evasion: A Retrospective View,” National Tax Journal, Vol. 58, No. 4, 2005, pp. 643-663.

comments powered by Disqus

Copyright © 2020 by authors and Scientific Research Publishing Inc.

Creative Commons License

This work and the related PDF file are licensed under a Creative Commons Attribution 4.0 International License.