Tax Progressivity, Income Distribution and Tax Non-Compliance

Tatiana Damjanovic and David Ulph ()
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David Ulph: University of St. Andrews St Salvator’s College, Oxford University Centre for Business Taxation

No 928, Working Papers from Oxford University Centre for Business Taxation

Abstract: This article examines the determinants of tax non-compliance when we recognise the existence of an imperfectly competitive "tax advice" industry supplying schemes which help taxpayers reduce their tax liability. We apply a traditional industrial organisation framework to model the behaviour of this industry. This tells us that an important factor determining the equilibrium price and hence, the level of noncompliance, is the convexity of the demand schedule. We show that in this context, this convexity is affected by the distribution of pre-tax income, the progressivity of the tax-schedule and the way in which monitoring and penalties vary with income. It is shown that lower pre-tax income inequality as well as a less progressive tax code may cause more tax minimisation activities. Therefore, the frequently advocated policy of reducing the highest tax rate may fail as a policy directed at improving tax discipline. One way of offsetting the possible harm to tax compliance from a less progressive tax could be an adjustment of the penalty and monitoring functions.

Keywords: tax compliance; tax administration; inequality; tax progressivity; tax monitoring; penalty function (search for similar items in EconPapers)
JEL-codes: H21 H23 H26 (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-acc, nep-pbe and nep-pub
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Tax progressivity, income distribution and tax non-compliance (2010)
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