Kim, Youngse: Tax Evasion, Income Distribution, and Progressive Policy
World Conference Econometric Society, 2000, Seattle

Youngse Kim, Yonsei University
Tax Evasion, Income Distribution, and Progressive Policy
Session: C-2-12  Saturday 12 August 2000  by Kim, Youngse
This paper aims at narrowing the gap between empirical evidence and theory in tax evasion, by incorporating continuous income distribution into the stigma-based tax evasion model. The paper investigates the effects of income distribution on the existence of multiple equilibria, tax progressivity on the identities of evaders, and various forms of tax reform on corruption. Specifically, the paper elaborates three main points. First, multiple equilibria exist if income distribution is sufficiently concentrated because the social coordination effect dominates the individual characteristics effect. Second, the affluent tend to evade under a sufficiently progressive tax policy, while the relatively poor have more incentive to understate their income under flat-rate tax schemes. Third, a tax reform that decreases marginal tax rates for all income classes decreases corruption, regardless of the nature of underlying tax policies. If a tax reform reduces the burden of the poor at the expense of the rich, then the results are ambiguous. One determinate case loosely states that corruption increases if the pre-reform critical type, who was indifferent between evading and not, is supposed to bear a heavier burden after the reform than before.

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