Tax Evasion, Tax Avoidance and The Influence of Special Interest Groups: Taxation in Iceland from 1930 to the Present

This paper focuses on tax evasion and tax avoidance in Iceland, and on how special interest groups have shaped the taxation system to serve their own ends. The period covered is from 1930, when the present Icelandic system of power was established, to the present. Tax evasion is sometimes an intended, and other times an unintended response to taxation.Willful tax evasion is more likely to occur if consensus regarding fairness and equality of the tax-code is lacking. Tax evasion is an integral part of the “underground economy”, or more formally, the Non-Observed Economy (NOE).Measuring the size and scope of the NOE in general, and tax evasion in particular, is a difficult task.We compare results from three methods for estimating the size of the Gross Domestic Product (GDP): the production approach, the expenditure approach, and the income approach. The results of applying these three methods should, in principle, be identical, but they are not. We use the difference, guided by historical facts and anecdotes, to give an idea of the magnitude of tax evasion during the 20th century. We suggest that the construction of the tax system to serve special interest groups may have disrupted the social, judicial, political and economic balance of the Icelandic “project”.