Essays on Tax Evasion

Abstract

The three essays in this dissertation aim to broaden our understanding of tax evasion and tax enforcement problems. First two essays develop theoretical models to understand how deviation from standard compliance theory affects our understanding of existing optimal audit rules. The third essay looks at consumer response to a change in the degree of enforcement.

Chapter 1, studies the influence of tax preparers on tax compliance. This work formalizes the role of tax preparers as information aggregators whom taxpayers can purchase information from that is not available to the public. The presence of tax preparers in such setting always reduces compliance. Moreover, strikingly, if demand for tax preparer services is high enough the government can mitigate evasion by fully revealing its audit strategy.

Chapter 2, examines how introducing lying aversion to taxpayer utility alters existing optimal audit rules. Specifically, this paper shows that cutoff audit rules, in which every taxpayer with a reported income below a certain threshold is audited with a fixed probability that ensures honest reporting, can perform worse than a random audit rule where all taxpayers are audited with a constant probability.

Chapter 3, joint with Tejaswi Velayudhan and Eleanor Wilking, tests the theory of statutory neutrality which predicts that structuring as a ‘use tax’—where the consumer remits—or, as a ‘sales tax’—under which the retailer remits—should have no effect on the fundamental parameters of the tax system. By using data from Nielsen Consumer Panel and monthly, zip-code level information on local sales taxes we show that consumers reduce their online expenditures in response to Voluntary Collection Agreements (VCA) which changed tax collection structure from a 'use-tax' to a 'sales tax'.