Income Tax Evasion

Jamaica\u27s 1986 personal income tax reform moved the nation well along toward tax simplification, a more uniform and fair treatment of taxpayers, removal of disincentives to in­creased work effort and to work effort allocation across sectors and a more level playing field for investment. The major elements of the reform are a flat rate income tax, a higher income exemption level, and the elimination of all tax credits and most nontaxable perquisites. While the impact of the reform on revenues and on the burden of various types of taxpayers has been carefully analyzed, much less has been done in terms of studying the impact on those who do not pay -- ­those who evade the income tax by either under­reporting or not filing. This paper presents estimates of the amount, structure and deter­minants of evasion by Jamaica\u27s hard-to-tax sec­tor, the self-employed. It should be emphasized at the outset that Jamaica\u27s problems with income tax evasion are not solved by the flat tax. While the new system lessens the rewards for evasion and through simplification makes compliance and monitoring easier, it will not automatically draw the self­-employed into the tax net. Why would a person who is successful at evading tax at a 57 1/2 percent marginal rate voluntarily come forward to pay because the rate has been dropped to 33 1/3 per­cent? The structural reform must be accompanied by a vigorous program of administrative im­provements. This is all the more reason to conduct a careful analysis of the amount and structure of income tax evasion. How much additional tax revenue could be captured in an effective pro­gram of enforcement, and what income groups, occupations, etc., should be targeted for increased coverage, examination and audit? The next section of this chapter summarizes the results of analyses of the national income accounts and the taxpaying characteristics of a random sample of six professional occupations. Both approaches are meant to infer the total amount of self-employed income tax evasion. The methodology used in drawing and analyzing a much larger and more representative sample of self-employed individuals is discussed in the fol­lowing section. Then we turn in the next three sections to the heart of this work: an analysis of filing rates and of the characteristics of self-­employed filers, an analysis of the revenue loss that results from those who do not file, and an analysis of audit/examination reports to estimate and explain the degree of underreporting by self­-employed filers. The final section of the paper is concerned with how tax policy and tax administration might be altered to draw the self­-employed into the tax net