{"id":12381,"date":"2026-03-17T18:06:59","date_gmt":"2026-03-17T17:06:59","guid":{"rendered":"https:\/\/www.rivistaeco.com\/?p=12381"},"modified":"2026-03-17T18:06:59","modified_gmt":"2026-03-17T17:06:59","slug":"the-biggest-tax-evasion-comes-from-small-players","status":"publish","type":"post","link":"https:\/\/www.rivistaeco.com\/en\/2026\/03\/17\/the-biggest-tax-evasion-comes-from-small-players\/","title":{"rendered":"The Biggest Tax Evasion Comes from Small Players"},"content":{"rendered":"<p><em>Tax evasion is often portrayed as a battle between governments and large multinational corporations. But this narrative can be misleading. In advanced economies, the largest share of missing tax revenue originates elsewhere: in the widespread behavior of self-employed workers and micro-enterprises. Individually, the amounts involved are small, but collectively they have a major impact on public finances. This creates a central policy dilemma: how to address evasion where it is most widespread, if traditional audits are costly and inefficient? One answer comes from an often-overlooked Italian experience: the sector studies. Introduced in the late 1990s, these tools show how targeted use of information and incentives can change behavior and increase tax compliance. Ultimately, they redefine the relationship between tax authorities and small economic operators. <\/em><\/p>\n<p>&nbsp;<\/p>\n<p>When discussing tax evasion and avoidance, attention often focuses on large multinational corporations and the shifting of profits to low-tax jurisdictions. This is an important issue, but it risks overshadowing an even more significant problem. In many advanced economies, the largest share of missing tax revenue does not stem from corporate tax avoidance, but from evasion by small businesses: self-employed workers, micro-enterprises, and sole proprietors.<\/p>\n<h3><strong>Small Evaders Matter More Than Large Ones<\/strong><\/h3>\n<p>&nbsp;<\/p>\n<p><strong><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-12376 size-large\" src=\"https:\/\/www.rivistaeco.com\/wp-content\/uploads\/sites\/2\/2026\/03\/Eco-26-1_grafici_eng_paradisi-1024x795.png\" alt=\"\" width=\"640\" height=\"497\" srcset=\"https:\/\/www.rivistaeco.com\/wp-content\/uploads\/sites\/2\/2026\/03\/Eco-26-1_grafici_eng_paradisi-1024x795.png 1024w, https:\/\/www.rivistaeco.com\/wp-content\/uploads\/sites\/2\/2026\/03\/Eco-26-1_grafici_eng_paradisi-300x233.png 300w, https:\/\/www.rivistaeco.com\/wp-content\/uploads\/sites\/2\/2026\/03\/Eco-26-1_grafici_eng_paradisi-768x596.png 768w, https:\/\/www.rivistaeco.com\/wp-content\/uploads\/sites\/2\/2026\/03\/Eco-26-1_grafici_eng_paradisi-1536x1193.png 1536w, https:\/\/www.rivistaeco.com\/wp-content\/uploads\/sites\/2\/2026\/03\/Eco-26-1_grafici_eng_paradisi-600x466.png 600w, https:\/\/www.rivistaeco.com\/wp-content\/uploads\/sites\/2\/2026\/03\/Eco-26-1_grafici_eng_paradisi.png 2008w\" sizes=\"auto, (max-width: 640px) 100vw, 640px\" \/>\u00a0<\/strong><\/p>\n<p>Each individual business evades relatively little. But there are so many of them that, collectively, they create a substantial gap in public finances. In Italy, revenue losses due to evasion by small businesses amount to about 7 percent of total tax revenues. This estimate combines administrative data on firms\u2019 accounts with audit results, which allow the quantification of undeclared taxes. In the United States, the figure is almost identical. In both countries, losses associated with large firms\u2019 evasion amount to only about 1\u20132 percent. The comparison with multinational profit shifting is equally striking: evasion by small operators generates far greater revenue losses\u2014up to seven times higher.<\/p>\n<p>There is another important point to clarify. The evasion rate of small Italian businesses is not particularly different from that observed in comparable countries. What makes Italy more problematic is the structure of its productive system: small operators account for a very large share of the total, and for this reason overall evasion is higher.<\/p>\n<h3><strong>When Resources for Audits Are Limited<\/strong><\/h3>\n<p>Why do small businesses evade so much? Part of the answer lies in their characteristics. Unlike large firms, their activities are less observable from the outside: there is often a lack of third-party information that would allow tax authorities to reconstruct revenues and transactions accurately. Their accounting requirements are simpler and less stringent, making it easier to conceal part of their income. Moreover, many small operators sell directly to final consumers, where transactions often occur without intermediaries and without automatic reporting. Their opportunities for evasion are greater, and the perceived risk of detection is lower.<\/p>\n<p>If evasion among small businesses is so significant, why do tax administrations focus most of their audit efforts on large firms? This is not just an Italian phenomenon: over the past twenty years, more than seventy countries have created specialized units dedicated exclusively to large taxpayers, allocating a significant share of audit resources to them. The reason lies in a cost-benefit calculation.<\/p>\n<p>Auditing a large company is expensive, but it can generate substantial recoveries. By contrast, auditing a small business requires time, personnel, and resources that are often not offset by the amount of tax recovered. From the perspective of a tax authority operating under budget constraints, the choice is almost inevitable: focus on where returns are expected to be highest.<\/p>\n<p>However, this efficiency-driven logic leaves uncovered precisely the area where overall evasion is most widespread. This is the core dilemma of anti-evasion policy, made even more acute by the gradual reduction in resources devoted to inspections observed in recent years in Italy and other countries.<\/p>\n<h3><strong>The Sector Studies<\/strong><\/h3>\n<p>If it is not feasible to audit everyone, the key question becomes: how can evasion among small businesses be reduced without multiplying inspections and administrative costs?<\/p>\n<p>One possible answer is to make smarter use of the information already available to tax authorities, combining it with incentive mechanisms. The basic idea is simple: instead of relying solely on the threat of audits, taxpayer behavior can be guided by making accurate reporting more advantageous. This strategy does not require additional resources, but rather a different use of existing ones.<\/p>\n<p>Perhaps surprisingly, Italy experimented with this approach earlier than many other countries. In the late 1990s, the <em>sector studies<\/em> (<em>studi di settore<\/em>) were introduced, remaining in force until 2017. Their functioning was based on a prediction: for each firm, the tax authority estimated an \u201cexpected\u201d level of revenue using available information on sector, location, size, and production structure.<\/p>\n<p>The real innovation was not the prediction itself, but how it was used. The estimate was communicated directly to the firm through the software used to file tax returns. Most importantly, the tax administration committed to reducing the probability of audits for firms that aligned with the estimate. This created a strong incentive for compliance. Declaring revenues in line with the tax authority\u2019s estimate became a rational choice, even for those who might otherwise have had an incentive to evade.<\/p>\n<p>A natural objection is that firms might adjust their declarations not because they were previously evading, but simply to avoid audits. In that case, the risk would be pushing essentially honest firms to declare more than they actually earned, effectively increasing their tax burden just to reduce administrative risk.<\/p>\n<p>However, the data allow us to assess whether this risk is real. If this adjustment mainly affected honest firms, we would expect to observe it uniformly. In fact, the opposite occurs. The share of firms reporting exactly at the predicted level is higher in areas where evasion is more widespread across different types of taxation\u2014from VAT to property taxes, from cadastral irregularities to rental income evasion.<\/p>\n<p>The same pattern emerges at the sectoral level. Alignment is more frequent in sectors that sell primarily to final consumers, where revenues are less traceable due to the absence of cross-reporting by other firms. It is well known that as direct sales to consumers increase, the share of income automatically reported to tax authorities by third parties decreases, and opportunities for evasion increase.<\/p>\n<p>Overall, these findings suggest that such measures do not indiscriminately affect honest firms, but primarily target activities that are likely to have previously underreported a significant share of their revenues.<\/p>\n<h3><strong>A \u201cReward\u201d for Compliant Firms<\/strong><\/h3>\n<p>In 2011, a reform of the sector studies introduced a so-called \u201creward regime.\u201d The idea was to further strengthen incentives: firms declaring revenues above the estimated level and meeting certain compliance indicators would receive even greater protection\u2014almost complete\u2014from audits.<\/p>\n<p>This change significantly altered behavior. Firms that had previously reported below the estimated level began to declare more. Those already above it, realizing they were less at risk than expected, slightly reduced their reported income. However, the overall effect was clearly positive.<\/p>\n<p>Overall, reported income increased. Not only revenues\u2014the direct target of the reform\u2014but also total declared profits, which rose by about 16 percent on average. The final outcome was a generalized increase in tax compliance.<\/p>\n<p>Alongside these positive results, it is important to acknowledge some limitations of the sector studies, particularly in their early phases. The complexity of the calculation mechanism often reduced perceived transparency and increased reporting burdens, while the grouping approach struggled to capture qualitative differences across business models and to adapt quickly to economic or sectoral changes. In some cases, this contributed to a perception of unfairness, especially among atypical but essentially compliant firms.<\/p>\n<p>The transition to the current <em>Synthetic Reliability Indicators<\/em> (ISA) should be seen as an attempt to address these issues. ISA provides greater flexibility, a more dynamic approach, and a shift in perspective\u2014from a system perceived as punitive to one that rewards reliable firms by reducing certain administrative burdens. This evolution does not contradict the lesson of the sector studies; rather, it reinforces it, showing how approaches based on information, transparency, and incentives can remain central while requiring adjustments over time.<\/p>\n<h3><strong>The Future of Anti-Evasion Policies<\/strong><\/h3>\n<p>Today, tax administrations have access to an unprecedented amount of information and increasingly sophisticated tools to analyze it. The real challenge is not so much collecting new data, but using existing data effectively to shape behavior. More accurate predictive models make it possible to better calibrate incentives and reduce the risk of targeting compliant firms. The experience of the sector studies demonstrates that when information is used transparently and intelligently, it can become a powerful tool to improve tax compliance\u2014especially where traditional audits are costly and ineffective.<\/p>\n<p>Policies that reduce reliance on inspections and encourage voluntary compliance also transform the relationship between tax authorities and businesses. The administration moves away from a purely ex post enforcement model and takes on a role more akin to that of a regulator that shapes behavior by clarifying expectations and consequences. The result is a more cooperative approach, in which accurately reporting income becomes a convenient and natural choice, rather than an obligation imposed from above.<\/p>\n<p>The lesson is simple but ambitious: improving tax compliance does not necessarily require more audits, but better-designed systems that make accurate reporting the most advantageous outcome for firms.<\/p>\n<p>&nbsp;<\/p>\n<p><em>Matteo Paradisi is an Assistant Professor at the Einaudi Institute for Economics and Finance (EIEF) and teaches at LUISS. His research focuses on labor economics and public economics. He earned his PhD from Harvard University and completed a postdoctoral fellowship at the National Bureau of Economic Research (NBER).<\/em><\/p>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Tax evasion is often portrayed as a battle between governments and large multinational corporations. But this narrative can be misleading. In advanced economies, the largest [&hellip;]<\/p>\n","protected":false},"author":12282,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[1],"tags":[],"coauthors":[317],"class_list":["post-12381","post","type-post","status-publish","format-standard","hentry","category-non-categorizzato"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.5 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>The Biggest Tax Evasion Comes from Small Players - Rivista Eco<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.rivistaeco.com\/en\/2026\/03\/17\/the-biggest-tax-evasion-comes-from-small-players\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"The Biggest Tax Evasion Comes from Small Players - Rivista Eco\" \/>\n<meta property=\"og:description\" content=\"Tax evasion is often portrayed as a battle between governments and large multinational corporations. 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