Tax Evasion and Income Inequality in European Countries: An Approach with Dynamic Panel Data Analysis
Keywords:
Tax Evasion, Income Distribution, Inequality, Dynamic Panel Data AnalysisAbstract
Tax avoidance and evasion, which impose costs on rational individuals to maximize their benefits, are among the factors that distort income distribution. This study uses dynamic panel data analysis to analyze the relationship between tax evasion and income inequality in 28 European countries between 2004 and 2016. Our analysis includes tax evasion data from the European Commission on the Panama Papers report and income inequality data using Gini coefficients provided by Frederick Solt. The main objective is to examine the fairness effect of tax evasion on income distribution. The Generalized Method of Moments provided reliable estimates to account for potential endogeneity and autocorrelation issues. We find that an increase in income inequality significantly increases tax evasion. As a result, a 1-unit change in the gini coefficient is associated with an 18-unit increase in tax evasion.
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