TAX BASE EROSION IN DEVELOPING-COUNTRIES

Demonstrates a set of methods by which micro-level estimates of the amount of income that escapes individual income taxation via both legal and illegal means can be generated and utilized. Jamaica is examined as a case study, and the estimates presented were used by the government in its 1986 tax reform program. Estimates of the various types of taxed and untaxed income for 1983 are calculated using several unique sources of information on income recipients in Jamaica. These estimates are used to construct a measure of comprehensive income for each individual, and this expanded measure of income is then used to estimate the incidence of taxes actually paid relative to comprehensive income, as well as the amount and the distribution of taxes that were not collected. The results indicate that there is enormous erosion of the income tax base in Jamaica. Failure to tax comprehensive income has seriously compromised the statutory goals of the tax: it has led to a large reduction in the progressivity of the tax, it has introduced horizontal inequities, and it has cost an amount in revenues equivalent to about 84% of actual collections. -from Authors