Essays on fiscal policies and tax evasion

Broadly speaking, this dissertation studies fiscal policy mechanisms governments set to retrieve the revenues needed for public expenditure. More concretely, the main question is if these asymmetrical information mechanisms lead to a “desired purpose” and whether they are indeed optimal and fair for both governments and taxpayers. It appears that fiscal policies are among the main forces of unfairness and are an obstacle for new small businesses and practitioners and may also hamper the economic growth of most (developing) countries. The first chapter discusses what we already know about tax evasion and the optimal choice of the latter. Although the scope of this thesis is to go beyond a comprehensive literature review, this initial phase builds an existing solid basis to the rest of the work. This first part presents the different processes of how a taxpayer faces the “evasion choice”, as well as the different analytical models which have been used in this field. The second chapter focuses on a widespread practice for governments, which is to gather observable and measurable characteristics of taxpayers and to group the population into homogeneous categories in order to better estimate their real gross income. Although it is common to keep income estimates hidden, in Italy these are announced to the taxpayers before the latter are asked to fill in their tax declarations. The mechanism used in Italy is called Sector Studies (in Italian “Studi di Settore”) and relies on taxpayers’ gathered information both to partition the population into fairly homogeneous clusters and to determine their presumed income that they ought to declare. The Sector Studies mechanism relies on a cut-off policy: once the government choses and announces the estimated income, it is common knowledge that all taxpayers who declare less than this estimation are surely audited. Thus, it is an asymmetrical information mechanism where taxpayers enjoy the informational advantage. The problem that a taxpayer faces when deciding their declaration in such a scenario is analyzed. The principal aim is to understand whether this cut-off policy is indeed optimal for the government and if it is fair to the taxpayers. Starting from what is happening in Italy - that is the greatest part of the population declares its estimated income but there is always a group that declares differently - a theoretical model is constructed where the income distribution is fixed and audits are costly for both government and taxpayers. The main finding is the characterization of the solution to the taxpayer’s problem. When taxpayers are risk-neutral and uniformly distributed in a given segment, the cut-off policy gives rise to three different groups into which taxpayers are endogenously divided. The lowest group is audited with certainty, so that agents bear the audit cost and no individual dishonestly reports her income (Compliance Taxpayers). Reports in the middle group are equal to the estimated income (Over-Declaration) so that no one is audited but individuals pay more taxes than due (Fake Congruous). Declarations in the highest group are equal to the estimated income so that no one is audited but since individuals’ real income is greater than the estimated one, they pay less taxes than due and so evade (Evaders). The third chapter addresses another fiscal mechanism concerning the exchange of information and revenue-sharing in tax-treaties. Basically, the situation where firms of a developed country can produce some revenues in a developing one is modeled and analyzed. In such a situation, worldwide income taxation in the country of residence is the legal dogma of international taxation commonly used. This dogma is questioned from the perspective of relations with developing countries from a legal and economic perspective, and a modern and fair proposal for tax treaties is made. It is shown under which conditions a developing and a developed country will voluntarily sign a tax treaty where information is exchanged truthfully and whether they should share revenues. Moreover, it proves how the conclusion of a tax treaty can assist in the implementation of a tax audit system.