Tax evasion, market adjustments, and income distribution

James Alm () and Matthias Kasper
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Matthias Kasper: Tulane University, USA

IZA World of Labor, 2020, No 91v2, 91

Abstract: How does tax evasion affect the distribution of income? In the standard analysis of tax evasion, all the benefits are assumed to accrue to tax evaders. However, tax evasion has other impacts that determine its true effects. As factors of production move from tax-compliant to tax-evading (informal) sectors, these market adjustments generate changes in relative prices of products and factors, thereby affecting what consumers pay and what workers earn. As a result, at least some of the gains from evasion are shifted to consumers of goods produced by tax evaders, and at least some of the returns to tax evaders are competed away via lower wages.

Keywords: tax evasion; tax incidence; general equilibrium (search for similar items in EconPapers)
JEL-codes: C91 H26 (search for similar items in EconPapers)
Date: 2020
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Working Paper: Tax Evasion, Market Adjustments, and Income Distribution (2020)
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