Denmark Turns Up the Heat on Tax Evasion with Detection Methods

======================================================

A recent study has shed light on the effectiveness of tax audit methods in Denmark, highlighting the significant impact of perceived probability of detection on taxpayer behavior.

The Study’s Findings

The research, conducted by a team of economists, used a randomized experiment to assess the effects of audits and audit threats on tax compliance. The study found that income categories subject to third-party reporting had evasion rates ranging from 0.2 percent to 0.9 percent, while self-reported income had evasion rates of approximately 37 percent.

The Power of Audits

The experiment involved randomly dividing taxpayers into two groups: one where all participants were audited, and another where none were audited. The following year, each group was further divided into sub-groups with varying audit probabilities, ranging from zero to 100 percent.

Results showed that audits had a significant impact on subsequent reporting of self-reported income, generating substantial future tax revenue through behavioral responses to increased perceived detection probability. Audit threats also led to upward adjustments in self-reported income.

Behavioral Responses

The study further found evidence of behavioral responses to marginal tax rates among Danish taxpayers, with many bunching at kink points where marginal tax rates jump from 49 percent to 62 percent. However, audits revealed that the majority of these taxpayers did not evade taxes, suggesting that these responses were primarily driven by labor supply and tax avoidance rather than evasion.

Implications for Tax Policy

The findings have significant implications for tax policy, indicating that broadening information reporting requirements can have a substantial impact on tax compliance. The Danish government may consider implementing similar measures to combat tax evasion and increase revenue collection.

Conclusion

In conclusion, the study demonstrates the effectiveness of tax audit methods in Denmark, highlighting the importance of perceived probability of detection in shaping taxpayer behavior. As governments around the world grapple with tax evasion and revenue shortfalls, this research offers valuable insights into the impact of audits and audit threats on tax compliance.