TAX COMPLIANCE, FISCAL CAPACITY, AND URBAN GROWTH: A THREE-COMPONENT REVIEW OF INCOME TAX BEHAVIOR

This document presents theoretical, methodological, and empirical considerations on personal income tax compliance in general. Then, it provides an analytical framework to systematically explain the changes observed in income tax collection, with a focus on developing countries and empirical references to Ecuador. It compares two major income tax models from the economic literature and introduces behavioral based strategies to reduce tax evasion by integrating analytical and behavioral approaches. This analysis shows that tax compliance has an inherent counterpart, tax noncompliance, which remains prevalent in models rooted in punitive or crime-based assumptions. While such models may be relevant in certain institutional contexts, the review identifies four major gaps in traditional evasion frameworks, particularly their limited predictive power. Additionally, methodological and applied studies reveal further weaknesses across existing measurement approaches. Beyond the tax system, the review highlights how income tax compliance directly shapes fiscal capacity, influencing the ability of governments to finance housing policies, regulate construction activity, and invest in urban infrastructure. Weak compliance reduces the fiscal space required for sustainable urban development. Finally, the complexity of regulation of construction sector and its documented susceptibility to money-laundering risks create additional challenges for revenue administration and urban governance. These structural vulnerabilities underscore the importance of strengthening tax compliance as a central component of public finance, urban planning, and equitable city growth.