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The Effects of the Interaction between Direct and Indirect Tax Evasion: The Cases of VAT and RST

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  • Fedeli, Silvia

Abstract

Value added tax (VAT) and retail sales tax (RST) are economically equivalent tax alternatives on consumption expenditure. This paper shows that, if indirect taxation is joined to direct taxation, with unethical agents, the equivalence in terms of government's revenues does not hold. We consider a model where, under both the VAT and RST regimes, the decisions on tax evasion result from a Nash-bargaining process involving all agents in the market. In either case, the tax authority refers to a generalised invoice-system for registered traders' income tax-base determination purposes. We analyse the chain of reported transactions and show that the technical differences between VAT and RST generate different amounts of direct and indirect tax evasion. It turns out that under RST the actual government revenues are lower than under VAT.

Suggested Citation

  • Fedeli, Silvia, 1998. "The Effects of the Interaction between Direct and Indirect Tax Evasion: The Cases of VAT and RST," Public Finance = Finances publiques, , vol. 53(3-4), pages 385-418.
    • Handle: RePEc:pfi:pubfin:v:53:y:1998:i:3-4:p:385-418
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    Cited by:

    1. Kelly D. Edmiston & Richard M. Bird, 2007. "Taxing Consumption in Jamaica," Public Finance Review, , vol. 35(1), pages 26-56, January.
    2. Bird, Richard M. & Zolt, Eric M., 2005. "The limited role of the personal income tax in developing countries," Journal of Asian Economics, Elsevier, vol. 16(6), pages 928-946, December.

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