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12:30 - 13:45 23 May 2016

Using Movement of Exemption Cutoff to Estimate Tax Evasion: Evidence from Pakistan


IFS basement | Institute for Fiscal Studies (link Map)
7 Ridgmount Street | London | WC1E 7AE | United Kingdom

Open to: Academic | Student
Ticketing: Open

Speaker information

Mazhar Waseem, Manchester

Abstract: The emerging evidence from developing countries suggests that the costs of evasion there are roughly a reverse-L-shaped function of earnings: they are extremely low up to a given threshold and then rise sharply with evasion. Embedding such evasion costs into the standard model generates a discontinuous earnings supply function. Taxpayers report true earnings at zero tax rate but evade the amount that can be evaded at a negligible cost as tax rate increases slightly above zero. I develop a methodology that exploits the discontinuity to provide a lower bound on tax evasion. Using a series of tax reforms and administrative data from Pakistan, I test the predictions of the model and estimate that at least 70% of self-employment and 1% of wage income is evaded in the country.


Institute for Fiscal Studies
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