Abstract

Our aim in this paper is twofold. First, we seek to contribute to the debate on estimation of the tax gap by proposing a novel methodology to disaggregate the total tax gap empirically. Second, we analyze the effects of tax evasion in terms of primary distribution of income. Our methodology is based on an original integration of the top-down and the bottom-up approaches to estimating the tax gap. The former is based on the comparison between national accounts and administrative tax data and is employed to estimate the gap of the tax base. The bottom-up approach uses data from tax audits and is employed to derive figures on the tax gap disaggregated by type of taxpayer. Furthermore, the results of tax audits make it possible to examine how tax evasion modifies the progressivity of the tax system as well as the vertical and horizontal equity in the distribution of income. The analysis is conducted for Italian regions in order to take also the spatial distribution of the tax gap into account.