The effect of awareness and incentives on tax evasion

We examine the role of tax incentives and tax awareness on tax evasion. We are able to observe tax evasion of business owners in rich Swedish administrative panel data. During the period of 2006-2009, around 5% of tax returns overstate a claimed dividend allowance even after the tax authority has approved the returns. Tax awareness decreases and complexity increases the likelihood of misreporting. Our results indicate that some of the observed misreporting could be accidental while some misreporting is deliberate tax evasion. We identify a positive and significant effect of tax rates on tax evasion by exploiting a large kink in the tax schedule.