Tax Evasion and Corporate Taxation Flashcards
standard framework for considering an individual’s choice of whether to tax evade
deterrence model
Allingham and Sandmo Model
a risk-averse taxpayer decides whether and how much tax to evade in the same way they would approach any risky decision or gamble - by maximising expected utility
- people are influenced by possible legal penalties no differently than any other contingent cost
fixed input in A-S Model
labor income y is held fixed - taxpayer chooses only what income to report to the tax authority
excess burden of evasion
with income held fixed, the excess burden of tax evasion is the cost of paying taxes with uncertainty rather than certainty
In A-S model, evasion is (decreasing/increasing etc.)
- decreasing in penalty rate
- decreasing in probability of detection
- decreasing in degree of risk aversion
- tax rate increases have an income effect but no substitution effect
limitation of A-S Model
Does not address that the probability of detection varies by the type of evasion contemplated
third party information reporting
employers (and other entities) report payments made
directly to the tax authority
tax withholding
payer withholds tax due by payee and remits it directly to the tax authority
why is employee/employer collusion rare?
1) Accounting and payroll records that are widely used within
the rm; records need to report true wages in order to be
useful to run a complex business.
2) A single employee can denounce collusion between employer
and employees. Likely to happen in a large business (disgruntled employee, honest newly hired employee, whistle blower
seeking govt reward)
evasion in informal sector labour
(i) much of the gain from evasion may be shifted from the
evaders to the consumers of output through lower prices, and
the marginal evader gains nothing;
(ii) relative price eects tend to dampen the impact of tax
rate changes on the extent of evasion.
do didvend taxes affect investment - two views
Yes [old view]: firms are cash constrained (start-up)
Consider the return to raising a dollar of equity, investing and paying a dividend tomorrow.
* No [new view]: firms are cash rich (Apple, Google)
Consider the return to paying out $1 as a dividend today versus investing the money and paying it out as a
dividend tomorrow.
classical tax system
entity-level tax and then a subsequent,
separate, tax on shareholders when they receive corporate income in the form of dividends.
imputation system
some countries (including Australia) have corporate integration schemes in which the corporate and
personal taxes are linked, so that when shareholders pay taxes
on the dividends they receive, they can claim credits for taxes
paid by the corporation on the income that was used to pay
the dividend.
new view on dividends - pay dividend today
return to shareholder is (1 − τd), where τd is the tax rate on dividends (taxes at the same rate as personal
income in Australia)
new view on dividends - invest and pay dividend tomorrow
return to shareholder tomorrow is (1 − τd) (1 − τc) q where q is the marginal return to
investment in the rm and τc is corporate income tax rate
