Too Low to Be True: the Use of Minimum Thresholds to Fight Tax Evasion
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The enforcement of compliance with tax regulation is a complex task. This is particularly the case when the administrative capacity of the tax authority is low, as is often the case in developing and transition countries. In this paper, I first formally model the impact of minimum thresholds by explicitly taking into account the low administrative capacity. The model shows that the introduction of a threshold creates a spike and a "missing middle" in the distribution of declared incomes and highlights under which conditions introducing a threshold is likely to increase net revenues for the tax authority.Then, I draw on some international experiences in fighting tax evasion to identify tools that can be used to reduce underreporting by employed labor, small and medium enterprises, self-employed, and professionals. In particular, I analyze the Italian "Business Sector Analysis" and the Bulgarian "Minimum Social Insurance Thresholds".