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The Effects of the Interaction between Direct and Indirect Tax Evasion: The Cases of VAT and RST

Silvia Fedeli

Public Finance = Finances publiques, 1998, vol. 53, issue 3-4, 385-418

Abstract: Value added tax (VAT) and retail sales tax (RST) are economically equivalent tax alternatives on consumption expenditure. This paper shows that, if indirect taxation is joined to direct taxation, with unethical agents, the equivalence in terms of government's revenues does not hold. We consider a model where, under both the VAT and RST regimes, the decisions on tax evasion result from a Nash-bargaining process involving all agents in the market. In either case, the tax authority refers to a generalised invoice-system for registered traders' income tax-base determination purposes. We analyse the chain of reported transactions and show that the technical differences between VAT and RST generate different amounts of direct and indirect tax evasion. It turns out that under RST the actual government revenues are lower than under VAT.

Date: 1998
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Handle: RePEc:pfi:pubfin:v:53:y:1998:i:3-4:p:385-418