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Sasa Randjelovic Jelena Zarkovic-Rakic University of Belgrade – Faculty of Economics

Tax Design-Tax Evasion Relationship in Serbia: New Empirical Approach to Standard Theoretical Model. Sasa Randjelovic Jelena Zarkovic-Rakic University of Belgrade – Faculty of Economics. 2013 EUROMOD research workshop Technical University of Lisbon, Lisbon - Portugal 2-3 October 2013.

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Sasa Randjelovic Jelena Zarkovic-Rakic University of Belgrade – Faculty of Economics

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  1. Tax Design-Tax Evasion Relationship in Serbia: New Empirical Approach to Standard Theoretical Model Sasa Randjelovic Jelena Zarkovic-Rakic University of Belgrade – Faculty of Economics 2013 EUROMOD research workshop Technical University of Lisbon, Lisbon - Portugal 2-3 October 2013

  2. Outline • Tax evasion: theoretical framework • Taxevasion: literature reviewandaim of the paper • Taxreformscenarios • Data andmethodology • Research design • Results • Concluding remarks

  3. Income tax evasion: theoretical framework • Allingham-Sandmo model of determinants of taxevasion: • Trueincome (+, -, 0) • Penalty rate (-) • Probability of detection(-) • Marginaltax rate (-): • Yitzhaki’s critics: • if fine is a function of evaded tax a rise in the tax rate triggersdecline in tax evasion

  4. Incometax evasion: literature review and aim of the paper • Empirical literature: • Positive impact of increase in probability of detection and fines (Pommernehe (1996), Keen (2008)) • Tax evasion rises as true income is rising (Alm (1992)) • Negative relationship between MTR and non-reported income (Alm (1992), Pommernehe (1996))…confirms A-S model • Tax evasion decision – a question of rational choice under uncertainty • …then taxpayer would make tax evasion decision based on the change in disposable income, instead based on change in after-tax income • Aim of the paper: • Investigate the tax evasion response to change in EMTR, due to tax reform • Based on Serbian data

  5. Tax reform scenarios

  6. Data and methodology • SRMOD – tax & benefit microsimulation model for Serbia • Econometric analysis of cross-section data: OLS method • Dataset used in SRMOD: • Living Standard Measurement Survey 2007 • Survey performed by the Statistical Office of Serbia • Sample: 5,557 households (17,375 individuals)

  7. Research design • Research consists of three steps: • Computation of the EMTR in SRMOD (for baseline and reform scenarios); • EMTR (Effective Marginal Tax Rate) • Econometric estimate of elasticity of non-reported income to the EMTR, using micro data; • Computation of changes to the amount of non-reported income • By using the results on the changes to the EMTRs (under each reform scenario) and the estimated elasticity of non-reported income to the EMTR

  8. Results: Income Tax Evasion in Serbia – scale and structure • Taxevasion rate: (non-reportedincome/reportedincome)x100 • Taxevasion rate perdeciles

  9. Results: modeling tax evasion Elasticity of taxevasion rate (TAR) to emplyomentincome (EMPY), self-employmentincome (SEMPY) and EMTR The resultsconfirm Yitzhaki teorem

  10. Results: modeling tax evasion Ceterisparibus, eachreform scenario wouldyieldslightincrease in taxevasion: comprehensive>flat>dual The effectscould be reducedbyincrease in probability of detection

  11. Concluding remarks • Each reform scenario would imply fall in EMTR • ranging from 4.7 to 5.6 pp • Propensity to non-declarationrises as true income is increasing • There is statistically significant difference in respect of evasion of tax on employment and self-employment • Collection method doesmatter • When fine is a function of taxevaded, taxevasion is positivelyrelated to EMTR • …in accordancewith Yitzhaki theorem • Furthersteps: • Modeling for differentprobabilities of detectionandfines? • Multi-countryverification of Yitzhaki theorem?

  12. Thank youfor the attention! Questions or comments? randjelovic@ekof.bg.ac.rs

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