The Implication of Efficiency Wages On Tax Evasion and Tax Collections

Abstract

The conclusion of Peacock and Shaw's 1982 article "Tax Evasion and Tax Revenue Loss," which has received wide attention in the literature, indicates that a rise in tax evasion will definitely lead to lower tax collections. The present article makes a new attempt to reexamine the Peacock and Shaw proposition by introducing the principal tenets of the efficiency wage hypothesis. It is found that, in a context of efficiency wage model, a rise in the degree of tax evasion may enhance total tax collections rather than depress them.