Inequality in tax evasion: the case of the Spanish income tax

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Inequality in tax evasion: the case of the Spanish income tax. / Torregrosa-Hetland, Sara.

I: Applied Economic Analysis, Vol. 28, Nr. 83, 15.07.2020, s. 89-109.

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TY - JOUR

T1 - Inequality in tax evasion: the case of the Spanish income tax

AU - Torregrosa-Hetland, Sara

PY - 2020/7/15

Y1 - 2020/7/15

N2 - PurposeThis paper estimates tax evasion and its impact on progressivity, redistribution and the measurement of inequality, using microdata from the Spanish income tax for 2001-04.MethodologyThe approach follows Feldman and Slemrod (2007) by exploiting the relation of charitable donations with the composition of income, but introduces two methodological innovations which could be useful for further studies: a correction for sample selection with a Heckman two-step setting, and the calculation of different evasion rates for top incomes with an interaction term.FindingsEvasion in capital incomes was significant throughout these years. Financial incomes were reported at around 50-70 percent of their real value, with the lowest estimates corresponding to the top decile. Revenues from fixed capital display similarly low compliance rates for the top 10 percent. Tax evasion in self-employment incomes (direct assessment) is estimated at 20 percent for 2001. Mostly because of a composition effect, this means that fraud was higher at the top of the income distribution, thus having a regressive impact. Inequality statistics and top income concentration estimates should therefore be revised upwards.Originality / valueThis is the first paper to estimate the distributive impacts of tax evasion in Spain, and one of very few internationally.

AB - PurposeThis paper estimates tax evasion and its impact on progressivity, redistribution and the measurement of inequality, using microdata from the Spanish income tax for 2001-04.MethodologyThe approach follows Feldman and Slemrod (2007) by exploiting the relation of charitable donations with the composition of income, but introduces two methodological innovations which could be useful for further studies: a correction for sample selection with a Heckman two-step setting, and the calculation of different evasion rates for top incomes with an interaction term.FindingsEvasion in capital incomes was significant throughout these years. Financial incomes were reported at around 50-70 percent of their real value, with the lowest estimates corresponding to the top decile. Revenues from fixed capital display similarly low compliance rates for the top 10 percent. Tax evasion in self-employment incomes (direct assessment) is estimated at 20 percent for 2001. Mostly because of a composition effect, this means that fraud was higher at the top of the income distribution, thus having a regressive impact. Inequality statistics and top income concentration estimates should therefore be revised upwards.Originality / valueThis is the first paper to estimate the distributive impacts of tax evasion in Spain, and one of very few internationally.

KW - Income inequality

KW - Personal income tax

KW - Progressivity

KW - Redistribution

KW - Tax evasion

M3 - Article

VL - 28

SP - 89

EP - 109

JO - Applied Economic Analysis

JF - Applied Economic Analysis

SN - 2632-7627

IS - 83

ER -