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POLICIES TO COMBAT TAX EVASION IN A POST-CRISIS WORLD

john Hudson
University of Bath
Marta Orviska
Open Panel

Abstract

The economic crisis has put enormous pressure on public finances as governments seek to control deficits which threaten to spiral out of control. In this paper we present estimates of the level of tax evasion across the main OECD countries and show that it represents a considerable loss of revenue to governments. The main policies that governments have in combating tax evasion. include resources devoted to detecting it, primarily audits, and the penalties on tax evaders when caught. In both cases, the evidence is that both audits and penalties are below their revenue maximising level. We will compare different countries in this respect and also the changes that are currently taking place in the wake of the economic crisis. Apart from the risk and consequence of detection, governments can also try to influence the social acceptability of tax evasion. We further discuss why governments have appeared so reluctant to pursue the tax evader. The crisis provides an incentive for governments to begin to take the problems of tax evasion more seriously. The paper outlines the policies which will achieve this. There are important consequences of this, both for the market and democracy. For democracy, it should enhance a sense of fairness, and thus civic duty, amongst citizens. It should also remove an important distortion in the market, enhancing its efficiency. Enhanced public services and/or lower overall tax rates, facilitated by greater tax compliance, could also impact positively on both democracy and the market.