Tax Rates and Tax Evasion

In posts here and here, I linked high tax rates in Greece to tax evasion there. In response, Commenter Ben asked, "Is there a study that shows higher taxes lead to tax evasion?" Sure enough, there is a new working paper just out from the National Bureau of Economic Research, based on a study of 40,000 individual income tax filers in Denmark. "Using bunching evidence around large and salient kink points of the nonlinear income tax schedule, we find that marginal tax rates have a positive impact on tax evasion," the study says, while acknowledging, "this effect is small in comparison to avoidance responses." Whether the taxes are avoided (legal) or evaded (illegal) doesn't make that much difference for our purposes; the point is that governments can't just keep raising marginal tax rates and expect the action not to affect the base of declared revenue upon which the taxes are levied.