Question

Indicate how each of the following could impact tax evasion and explain why the effect takes place: a. An increase in MTRs b. A decrease in MTRs. c. An increase in the complexity of the tax code. d. An increase in the probability that a taxpayer's return will be audited. e. An increase in the penalty for tax evasion.

Answer 1

1. Increase in MTR will cause higher tax outgo and people will tend to evade taxes by filling lesser for returns
2. Similarly decrease in MTR will cause lower tax outgo and hence people will be more willing to pay taxes
3. Complexity of taxcode will have negligible effects because this results difficulty for exchequer in terms of administration
4. An increase in probability of tax audit will cause fear that illegal transactions or illegitimate sources of income will be tracked and hence tax evasion will be higher
5. An increased penalty on tax evasion will cause people to file more returns to save themselves for legal tangle.