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Evading Tax Evasion

ALESSANDRIA, ITALY – Tax evasion is a global scourge. The “black” economy has, by some estimates, reached 10% of GDP in advanced countries and can top 70% in developing countries. And it is getting worse.

Tax evasion is usually confronted in two ways: audits and harsh sanctions. But, as the rising tide of tax evasion suggests, these mechanisms amount only to a cat game of and mouse problem – and the mice, it seems, are winning.

As tax evasion becomes more pervasive, whole networks to help hide incomes have appeared, making it far less likely that those who break the law are punished. Moreover, because more people are evading taxes, tax administrations are under increasing pressure to become more lenient or to accept bribes.

One strategy for weakening ties among potential evaders is to introduce various conflicts of interests. For example, value-added tax is designed to encourage firms to procure invoices for their inputs in order to reduce their own tax outlays. But the results often fall short of the potential benefits, because VAT has helped inspire tax evaders to create even stronger networks that can hide an entire chain of transactions.