Abstract

One of the arguments advanced in favour of a tax shift from income to consumption taxation is that, with tax evasion, such a shift would increase the tax paid by evaders. Given that evasion is concentrated in specific sectors, individuals operating in such sectors, who evade all or most of their earnings, could spend only a share of their income in goods for which consumption taxes can be evaded. In this paper we show that, under the realistic assumption that the income and the consumption tax (the VAT or a sales tax) are jointly evaded, such argument cannot survive a more accurate analysis. As a consequence of the tax shift from the income to the consumption tax, prices will adjust to restore the original situation, with no effect on real quantities.