Essays on income tax evasion

Abstract

Tax evasion has a direct impact on government revenues and therefore capacity to provide public goods. Moreover, tax evasion imposes a welfare cost on society by having to resort to more distortionary taxes and discouraging financial transparency, both of which result in inefficient allocation of resources. If tax evasion is concentrated in certain segments of society, equity concerns also arise. The objective of my dissertation is to enhance our understanding of tax evasion-why people cheat the government, old and new ways of cheating, and which remedies may be effective. In Chapter 2, “Cheating the government: Does taxpayer perception matter?”, I ask whether people cheat (in the form of misreporting their income to tax authorities) because they know that they can get away with it or because they genuinely feel that the rules are unfair. Specifically, I incorporate taxpayer perception into a widely used consumption-based method for estimating income tax evasion. Compared to the standard method which distinguishes taxpayers only by their occupational or income type as a way of measuring their “ability” to misreport income, the refined method introduces taxpayers who may be “able but unwilling” to cheat because they feel fairly treated with respect to public services and compared to other taxpayers. Applied to a longitudinal data for Korea (2007-2015), the standard method yields a uniform tax evasion rate of 13 percent, but the refined method provides a range of 7 to 25 percent based on taxpayer perception. This implies that strategies for improving tax compliance must be tailored to different motivations for tax evasion. In Chapter 3, “Hide-and-seek: Can tax treaties reveal offshore wealth?”, I highlight that information asymmetry becomes a far greater challenge in a multiplejurisdiction context, where offshore centres can facilitate tax evasion. In response, governments have introduced new tax treaties to facilitate the exchange of financial account information between jurisdictions, including traditional tax havens. Based on international banking statistics, I examine whether these treaties have had a material impact on offshore tax evasion. Based on panel regression analysis, I find that crossborder deposits in traditional haven jurisdictions, taken as a proxy for offshore evasion in the literature, have declined substantially. However, I also find that these offshore assets are being relocated to few non-compliant tax havens and moreover, “non-haven” offshore financial centres, most notably the United States, which has yet to commit to reciprocal and automatic exchange of information and establish a public register of ultimate beneficial ownership.