To Comply or not to Comply: Persistent Heterogeneity in Tax Compliance and Macroeconomic Dynamics

Leonardo Barros Torres () and Gilberto Lima

No 2022_04, Working Papers, Department of Economics from University of São Paulo (FEA-USP)

Abstract: We set forth an overlapping generations model in which the microdynamics of tax compliance is coupled to the macrodynamics of the economy. We specify the proportion of individuals who do not comply with their tax obligations as endogenously time-varying using the discrete choice approach, which allows considering both deterministic components and idiosyncratically subjective motivations and proclivities (such as tax morale) as drivers of tax compliance. The model replicates (and hence provides an analytical framework for a potential interpretation of) some pieces of evidence on tax evasion. First, heterogeneity in tax compliance exhibits persistence and fluctuations over the long run. Second, the proportion of non-compliant taxpayers varies positively with the tax rate and negatively with the probability of detection of tax evaders. Third, the impact of a change in the proportion of non-compliant taxpayers on the per capita output over the long run is ambiguous.

Keywords: Tax compliance; discrete choice modeling; tax morale; heterogeneous behavior; macrodynamics (search for similar items in EconPapers)
JEL-codes: C02 C62 E13 H40 H62 (search for similar items in EconPapers)
Date: 2022-03-22
New Economics Papers: this item is included in nep-dcm, nep-dge, nep-iue, nep-mac, nep-pbe and nep-pub
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