Accessible Unlicensed Requires Authentication Published by De Gruyter August 16, 2016

Does Evasion Invalidate the Welfare Sufficiency of the ETI?

Christian Gillitzer and Joel Slemrod

Abstract

In an influential article, Raj Chetty (2009, “Is the Taxable Income Elasticity Sufficient to Calculate Deadweight Loss? The Implications of Evasion and Avoidance.” American Economic Journal: Economic Policy 1 (2):31–52) argues that in the presence of tax evasion the elasticity of taxable income (ETI) is no longer a sufficient statistic for the marginal efficiency cost of funds (MECF). We show that, under Chetty’s (2009, “Is the Taxable Income Elasticity Sufficient to Calculate Deadweight Loss? The Implications of Evasion and Avoidance.” American Economic Journal: Economic Policy 1 (2):31–52) risk-neutrality assumption, correctly measuring the standard MECF only requires adding detected evasion inclusive of penalties. In the more general case of risk aversion, it further requires amending the formula to address the private risk-bearing cost of tax evasion.

Acknowledgment

We would like to thank Shlomo Yitzhaki for helpful comments. Opinions expressed are those of the author, and should not be attributed to the Reserve Bank of Australia

References

Allingham, Michael G., and Agnar Sandmo. 1972. “Income Tax Evasion: A Theoretical Analysis.” Journal of Public Economics 1 (3–4):323–38. Search in Google Scholar

Chetty, Raj. 2009. “Is the Taxable Income Elasticity Sufficient to Calculate Deadweight Loss? The Implications of Evasion and Avoidance.” American Economic Journal: Economic Policy 1 (2):31–52. Search in Google Scholar

Feldstein, Martin S. 1999. “Tax Avoidance and the Deadweight Loss of the Income Tax.” Review of Economics and Statistics 81 (4):674–80. Search in Google Scholar

Mayshar, Joram. 1991. “Taxation with Costly Administration.” Scandinavian Journal of Economics 93 (1):75–88. Search in Google Scholar

Saez, Emmanuel, Joel Slemrod, and Seth Giertz. 2012. “The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review.” Journal of Economic Literature 50 (1):3–50. Search in Google Scholar

Slemrod, Joel. 1998. “Methodological Issues in Measuring and Interpreting Taxable Income Elasticities.” National Tax Journal 51 (4):773–88. Search in Google Scholar

Slemrod, Joel, and Shlomo Yitzhaki. 1996. “The Costs of Taxation and the Marginal Efficiency Cost of Funds.” International Monetary Fund Staff Papers 43 (1):172–98. Search in Google Scholar

U.S. Department of the Treasury. Internal Revenue Service. 2012. “Internal Revenue Manual.” http://www.irs.gov/irm/part20/index.html. Search in Google Scholar

Yitzhaki, Shlomo. 1974. “A Note on ‘Income Tax Evasion: A Theoretical Analysis’.” Journal of Public Economics 3 (2):201–2. Search in Google Scholar

Yitzhaki, Shlomo. 1987. “On the Excess Burden of Tax Evasion.” Public Finance Quarterly 15 (2):123–37. Search in Google Scholar

Published Online: 2016-8-16
Published in Print: 2016-10-1

©2016 by De Gruyter