Tax noncompliance and inequality - Three empirical essays for the case of Germany

Abstract

Chapter 1: Germany's efforts to curb international tax evasion. We evaluate the impact of regulatory attempts by German authorities to combat international tax evasion and report a 32-34% reduction of tax haven deposits in German banks as a reaction to bilateral information exchange. We test for reactions in monthly cross-border liabilities of German banks against non-residents employing a new narrative database of the German regulatory environment. Our findings are comparable in magnitude to a number of reference studies which confirms the choice of Germany as a valid case study for international tax evasion. We show disaggregated reactions for a list of tax havens and find large reactions to information exchange for Guernsey, the Bahamas, and Jersey. We also test a number of tax changes and data leaks. Tax evaders do not react to changes in tax rates. Leaks show consistent signs but are hardly significant which confirms information exchange as the main focus of analysis. Chapter 2: On income tax avoidance - a new micro data model for the German case. I study tax avoidance along the income distribution based on micro data from the Income and Consumption Survey (EVS) for the year 2013. The richness of the survey concerning income, taxes and expenditures is exploited by modelling the German tax code in terms of the items available in the EVS. I.e, components of taxable income and deductions are estimated as precisely as possible in a micro data model. Results confirm findings in the literature claiming that tax avoidance increases with rising income. The estimated amount of avoided tax is largest for the richest decile of individual tax payers, at around 2.8% of taxable income before deductions or 15.8% of taxes paid. Expectedly at the household level, the amount avoided by the highest income decile is reduced somewhat, to 1.8% of taxable income before deductions or 9.8% of taxes paid. Aggregate losses at the national level amount to at least EUR 10.7 bn, or 4.4% of assessed income tax revenues. Chapter 3: Income tax noncompliance in Germany, 2001-2014. This chapter estimates income tax underreporting for the case of Germany, by income category and along the income distribution. Comparing weighted samples of survey and tax data, we find patterns that are in line with the literature: Average income from self-employment and from rent and lease in the survey is higher than in the tax data, increasing in upper quintiles. However, income underreporting to the tax authorities may be one of several possible explanations for these descriptive findings. We therefore expand our analysis with the Pissarides/Weber (1989) approach that has been applied to a range of countries and data sources before. We use the German Socioeconomic Panel and the Taxpayer Panel, estimating food, housing cost and donation regressions. Results indicate that self-employment is associated with higher housing cost but not with higher food expenditure in the SOEP. In the TPP we find more robust indication of underreporting as self-employment and business incomes are significantly associated with higher donations and even more so for the top-income decile. We use our results to derive tentative estimates of aggregate tax revenue losses due to underreporting of self-employment and other non-wage incomes.