Do Higher Tax Rates Encourage/Discourage Tax Compliance?

Abstract

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.

A Conceptual Model of Sales Tax Compliance among Jordanian SMEs and Its Implications for Future Research

“…Sales tax rate is defined in the present study as the percentage imposed on goods and services supplies, regardless whether they are imported from abroad or from free zones, and local producers if the supply is taxable by sales tax law. Prior studies showed a significant negative relationship between tax rate and tax compliance (Kim, 2008;Ali, Cecil, & Knoblett, 2001), while some evidenced no significant relahip (e.g., Pellizzari & Rizzi, 2014;Seren & Panades, 2013). On a contrasting finding, Alm, Sanchez and Juan (1995) and Yitzhaki (1974) supported a positive relationship between increased rate of tax and increased tax compliance.…”

The Underground Economy in the U.S.A.: Preliminary New Evidence on the Impact of Income Tax Rates (and Other Factors) on Aggregate Tax Evasion 1975-2008

“…However, from a more rigorous theoretical perspective, it can be hypothesised that the effect of an income tax rate change on income tax evasion is actually ambiguous (Crane and Nourzad, 1986;Caballé and Panadés, 2007;Gahramanov, 2009;Freire-Serén and Panadés, 2013). The sign on the partial derivative of tax evasion with respect to the income tax rate theoretically depends upon the relative strengths of the substitution effect associated with the tax rate change on the one hand and the income effect associated with the tax rate change on the other hand.…”

“…Among the types of information thusly obtained and analysed are data on income tax evasion, income tax rates, penalties assessed on detected unpaid income taxes and audit rates. Such studies endeavour typically either seek to estimate the relative extent of tax evasion or to identify determinants thereof (Tanzi, 1982;Clotfelter, 1983;Carson, 1984;Crane and Nourzad, 1987;Poterba, 1987;Pyle, 1989;Erard and Feinstein, 1994;Feige, 1994;Joulfaian and Rider, 1996;Cebula, 1997;2004;2011;2013;Ali et al, 2001;Alm and Yunus, 2009;Cebula et al, 2009).…”

“…In the empirical literature, it has often been found that the degree of federal personal income tax evasion is positively affected by income tax rates (Tanzi, 1982;Clotfelter, 1983;Crane and Nourzad, 1987;Poterba, 1987;Feige, 1994;Joulfaian and Rider, 1996;Cebula, 1997;2004;2011;2013). Interestingly, Yaniv (1994) characterises Clotfelter (1983) as "the most relevant study" with respect to the impact of income tax rates on tax evasion, whereas Cox (1984) questions his findings.…”

The dynamic effects of fiscal reforms and tax competition on tax compliance and migration

“… See, for example, Allingham and Sandmo (), Yitzhaki (), Slemrod and Yitzhaki (). See Freire‐Serén and Panadés () for a review of the literature.…”