International Tax and Public Finance, 7, 177–194, 2000. c 2000 Kluwer Academic Publishers. Printed in The Netherlands.
Decomposing Revenue Effects of Tax Evasion and Tax Structure Changes
ARINDAM DAS-GUPTA* firstname.lastname@example.org Gokhale Institute of Politics and Economics, B MCC Road, Pune 411004, Maharashtra, India IRA N. GANG email@example.com Department of Economics, Rutgers University, New Brunswick, NJ 08901-1248 USA
This paper proposes a method for evaluating the impact of tax structure changes on tax revenue. The technique consists of decomposing the gap between actual revenue and potential revenue into components attributable to changes in (i) the tax rate structure (ii) deductions and (iii) tax evasion.
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For example, such advice has been given in the past by multilateral ﬁnancial agencies such as the International Monetary Fund and the World Bank to developing countries (see, for example, Shome, 1995). In broad outline this is the type of tax reform India underwent in the mid 1980s. Such advice has not been restricted to developing countries alone, as is suggested by the 1984 and 1986 reforms in the United States. There have been, however, no formal studies that we are aware of that analyze the effect of such reforms on the performance of the income tax in developing countries and trace the effects to different components of the reform package.3 In developed countries there has, of course, been extensive evaluation of tax reform packages.4 Developing countries differ from developed countries in several ways including their administrative ability, the nature of their tax base and the sophistication that can be expected of taxpayers, especially in informal sectors. Consequently, the effects of an actual tax rate reform and base broadening package of reforms in a developing country are of interest. Our results indicate that, for the reform episode we examine, reform did lead to revenue gains but that the magnitude of the gains was limited and failed to curtail losses from tax evasion. These losses can be curbed by reforming tax administration and strengthening tax