Withholding and non-withheld tax evasion

Most of the literature on tax evasion and labor supply ignores the fact that the major part of a wage-earner's tax liability is usually deducted at source by withholding regulations. However, while eliminating a single job holder's option of evading taxes through underreporting, a withholding system might give rise to evasion of non-withheld taxes through non-filing of individual returns, as well as induce employers to remit to the government less than the amounts withheld. This paper investigates the employer and employee tax fraud activity under a withholding system and the system's effect on the amount of tax escaping the tax collector.