Revisiting The Nexus Between Tax Evasion and Tax Rates with a Cross-Country Empirical Analysis.

Konukcu Önal D., Çavuşoğlu A. T.

6th International Conference on Economic Challenges in Enlarged Europe, Tallinn, Estonia, 15 - 17 June 2014, pp.1-20

  • Publication Type: Conference Paper / Full Text
  • City: Tallinn
  • Country: Estonia
  • Page Numbers: pp.1-20
  • Hacettepe University Affiliated: Yes


The general presumption that tax evasion increases with tax rates has gained dimension with the seminal paper of Allingham and Sandmo (1972) and with the influential note written by Yitzhaki (1974). Both studies put forth that tax evasion may as well be decreasing with higher marginal tax rates under absolute risk aversion. This study investigates the relationship between tax rates and tax evasion through a cross-country analysis, based on a recently estimated measure of the size of tax evasion in OECD economies over the 2000-2010 period. Our estimates imply an inverse relationship between the average income tax rate and evasion, whereas mixed results are obtained for the marginal tax rate. However, further estimations provide strong evidence on the presence of a critical tax rate above which the relationships between evasion and the tax rates are reversed.