Tax fraud and counterfeiting activities raise concern among governments, international organizations, media and academic researchers. Related efficiency issues and equity implications are of paramount importance because such illegal activities reduce public revenues, create inefficiency in resources allocation, and affect the individual income distribution. Because of such relevant effects, a natural question arises on which factors are likely to determine and motivate individuals' tax compliance or engagement in illicit activities. Traditionally, tax compliance has been dealt with as a decision-making problem of rational individuals under uncertainty, often affected by the presence of social norms and by other more conventional supply and demand factors. We shall afford this issue, by also complementing it by an in-depth analysis of the role played by equity considerations. One of the goals of this project is to contribute to the public and scientific debate on tax compliance by studying motivations related to fairness and equality of opportunity theory, neglected so far by the literature. The project is composed of three parts. The first part is devoted to theoretical and empirical/experimental analyses of some intertwined aspects related to the issue of tax fraud, the infringement of regulatory burdens on labour market and trade in counterfeit products. The second part aims at understanding whether fairness considerations might be listed amongst the determinants of tax evasion and counterfeiting activities. The third part is devoted to the analysis of the redistributive effects and distributional implications of such phenomena.
In this project, we aim at advancing with respect to the state of the art of the literature by providing comprehensive analyses of tax evasion and counterfeiting activities by means of original theoretical models, experimental and empirical evidence.
Indeed, the traditional portfolio analysis of the reporting decision, i.e. submitting a tax return with underreported liabilities as in Allingham and Sandmo (1972), does not fully capture the individual's decision on whether or not to even submit at all a tax return. Although, quite recently, the latter individual's decision has become of interest for policy makers (the number of ghosts in Italy, for instance, is quite high), it is object of a still reduced portion of theoretical literature (Erard and Ho 2001; Alm et al. 2016). On this basis, in an experimental context our reference types of individuals-taxpayers dealing with tax authority shall be the following: i) the Allingham and Sandmo taxpayers-types who choose following the standard portfolio analysis; ii) those who would never evade (i.e. fully honest); iii) those who would fully evade taxes (total tax-dodgers or ghosts).
As shown by Bloomquist (2003) for the United States, polarization of country's income distribution could undermine current and future tax enforcement efforts. Indeed, he finds that widening income inequality has contributed to the propensity to evade for the top decile wage share. More recently, Alstadsæter et al. (2017) show that tax evasion in Scandinavia rises sharply with wealth, a phenomenon that random audits fail to capture. Following this line, our research aims also at providing new insights focusing on the role played by distributive factors and fairness considerations, beyond income/consumption variables, in shaping tax evasion and counterfeiting attitudes. Indeed, behavioral economists have shown that notions of fairness and justice affect individuals' choices (Fehr and Schmidt 1999; Fehr and Gachter 2000; Fehr and Fischbacher 2003). More recently, special attention has been paid to those factors, which are beyond the individual control, suggesting that they matter for individuals when they are in charge of assessing outcome distributions (Cappelen et al. 2010).
However, none of these contributions has focused on how much the rejection for unfair systems as well as the acceptance of unfair resource allocation affect the individuals¿ decision to pay taxes. Our empirical analysis will fill this gap in the literature, by distinguishing between unfair and fair inequality. The former is the inequality that should be corrected, because it is determined by factors beyond the individual control (e.g., the family socio-economic background). The latter is the inequality that should be not corrected, because generated by individual choices and effort. The point at stake is that exogenous factors that are outside the sphere of the individual responsibility and endogenous factors that fall within the sphere of the individual responsibility would affect the tax evasion and counterfeiting decisions. This implies that not all inequalities have to be judged in the same way.
In this project, we also adopt this new perspective and add fairness considerations as possible drivers of counterfeiting because individuals' attitude towards counterfeits depends a broad set of factors (demographic, social and psychological), including their position in the social scale and the attempt to upgrade it, buying prestige by means of luxury goods. Indeed, as little is known about the real and natural attitudes of people in relation to tax avoidance (some evidence from the lab is provided by Doerrenberg and Duncan 2014), our studies can generate interesting empirical and experimental results in this regard and stimulate a more conscious debate on these issues, not only economically but also ethically and socially. Indeed, the scientific literature highlights that tax evasion may also have undesirable effects on the equity side involving the distribution of income (Roine 2006; Borck 2009; Bishop et al. 2000; Johns and Slemrod 2010; Traxler 2012).
The expected outcome of the project is to enhance the knowledge of the motivations of tax compliance and its effects, through theoretical models, empirical analyses, experimental and behavioral studies. The results will allow us to formulate the best policies to fight such perverse behaviors. The outcome of our research will be relevant not only for the scientific community but also for policy-makers, being useful to introduce policies aimed at reducing tax evasion and proposals for tax reforms, as well as counterfeiting-contrast strategies.