Tax Evasion and Inequality

Abstract

This paper attempts to estimate the size and distribution of tax evasion in rich countries. We combine random audits-the key source used to study tax evasion so far-with new micro-data leaked from large offshore financial institutions-HSBC Switzerland ("Swiss leaks") and Mossack Fonseca ("Panama Papers")-matched to population-wide wealth records in Norway, Sweden, and Denmark. We find that tax evasion rises sharply with wealth, a phenomenon random audits fail to capture. On average about 3% of personal taxes are evaded in Scandinavia, but this figure rises to close to 30% in the top 0.01% of the wealth distribution, a group that includes households with more than $45 million in net wealth. A simple model of the supply of tax evasion services can explain why evasion rises steeply with wealth. Taking tax evasion into account increases the rise in inequality seen in tax data since the 1970s markedly, highlighting the need to move beyond tax data to capture income and wealth at the top, even in countries where tax compliance is generally high. We also find that after reducing tax evasion-by using tax amnesties-tax evaders do not legally avoid taxes more. This result suggests that fighting tax evasion can be an effective way to collect more tax revenue from the very wealthy.

Wealth Taxation and Wealth Accumulation: Theory and Evidence from Denmark

“…When matching the model to the super wealthy in the ceiling DD -an empirical effect on taxable wealth of about 30% after 8 years -the long-run effect is considerably larger, about 70% after 30 years. While this effect may seem large, note that the wealthiest taxpayers have access to particularly effective avoidance and evasion vehicles, making our model of real wealth accumulation less suited for this population (see Alstadsaeter et al 2017a). 6 Our estimates for the super 5 The main reason why the mechanical effects are larger in the ceiling DD than in the couples DD is that the former considers households farther above the exemption threshold, so that their average after-tax return (which governs the mechanical effect) increases by more.…”

The Deterrence Effect of Whistleblowing An Event Study of Leaked Customer Information from Banks in Tax Havens

“…Since o¤shore tax evasion had never previously been exposed in leaks, o¤shore account owners and bankers most likely did not account for this risk before the leak from LGT Bank. 2 Alternatively, they may have assigned a very small probability to the possibility of a leak and updated their beliefs about this probability the …rst time a leak occurred. In either case, an increase in the perceived probability of a leak should be expected to deter the demand and supply of criminal o¤shore banking services and reduce the stock of deposits related to evasion in tax havens.…”

Income inequality: Does it matter?

“…Reduced fiscal income for the government is a driving force for the eradication of tax evasion (Alstadsaeter et al, 2017). However, there is no guarantee that the recovered revenue would have been spent on social goods for the underclass.…”

“…Thus, the income share of the wealthy segment of a population might indeed be substantially higher. According to Alstadsaeter, Johannesen & Zucman (2017), 40% of the richest 0.1 of the Norwegian households hid their assets offshore. In contrast, the low income segment of the population has of course no means to pay creative financial planners and tax lawyers to devise the ingenious legal methods of tax avoidance.…”