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Moral Constraints and the Evasion of Income Tax

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  • Ralph-C Bayer

    ()
    (School of Economics, University of Adelaide)

Abstract

This paper re-examines the individual income tax evasion decision in the simple framework introduced by Allingham and Sandmo (1972), where the individual taxpayer decides how much of his income is invested in a safe asset (reported income) and in a risky asset (concealed income). These early models could not convincingly reproduce the empirically observed positive influence of higher tax rates and higher gross income on tax evasion simultaneously. We replace the standard assumption that risk aversion is the factor limiting the extent of evasion by assuming risk neutral taxpayers and argue that this is a reasonable approximation. The observation that concealing income is costly leads to the conclusion that, instead of risk aversion, evasion costs (such as concealment expenses and moral cost) might be the factors that limit tax evasion. We reproduce the stylized facts not explained by older models for very general tax and penalty schemes, including those where the standard model definitely fails to do so.

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File URL: http://www.economics.adelaide.edu.au/research/papers/doc/wp2004-09.pdf
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Bibliographic Info

Paper provided by University of Adelaide, School of Economics in its series School of Economics Working Papers with number 2004-09.

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Length: 24 pages
Date of creation: 2004
Date of revision:
Handle: RePEc:adl:wpaper:2004-09

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Keywords: tax evasion; risk preferences; moral constraints;

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  1. Bernasconi, Michele, 1998. "Tax evasion and orders of risk aversion," Journal of Public Economics, Elsevier, vol. 67(1), pages 123-134, January.
  2. Colin Camerer, 1998. "Bounded Rationality in Individual Decision Making," Experimental Economics, Springer, vol. 1(2), pages 163-183, September.
  3. Kachelmeier, Steven J & Shehata, Mohamed, 1992. "Examining Risk Preferences under High Monetary Incentives: Experimental Evidence from the People's Republic of China," American Economic Review, American Economic Association, vol. 82(5), pages 1120-41, December.
  4. Machina, Mark J, 1987. "Choice under Uncertainty: Problems Solved and Unsolved," Journal of Economic Perspectives, American Economic Association, vol. 1(1), pages 121-54, Summer.
  5. Chander, Parkash & Wilde, Louis L, 1998. "A General Characterization of Optimal Income Tax Enforcement," Review of Economic Studies, Wiley Blackwell, vol. 65(1), pages 165-83, January.
  6. Christiansen, Vidar, 1980. "Two Comments on Tax Evasion," Empirical Economics, Springer, vol. 13(3), pages 389-93, June.
  7. Reinganum, Jennifer F. & Wilde, Louis L., 1985. "Income tax compliance in a principal-agent framework," Journal of Public Economics, Elsevier, vol. 26(1), pages 1-18, February.
  8. Fehr, Ernst & Schmidt, Klaus M., 1998. "A Theory of Fairness, Competition and Cooperation," CEPR Discussion Papers 1812, C.E.P.R. Discussion Papers.
  9. Charness, Gary B & Rabin, Matthew, 2001. "Understanding Social Preferences With Simple Tests," University of California at Santa Barbara, Economics Working Paper Series qt0dc3k4m5, Department of Economics, UC Santa Barbara.
  10. Axel Ockenfels & Gary E. Bolton, 2000. "ERC: A Theory of Equity, Reciprocity, and Competition," American Economic Review, American Economic Association, vol. 90(1), pages 166-193, March.
  11. Border, Kim C & Sobel, Joel, 1987. "Samurai Accountant: A Theory of Auditing and Plunder," Review of Economic Studies, Wiley Blackwell, vol. 54(4), pages 525-40, October.
  12. Andreoni, J. & Erard, B. & Feinstein, J., 1996. "Tax Compliance," Working papers 9610r, Wisconsin Madison - Social Systems.
  13. Mookherjee, Dilip & Png, I P L, 1990. "Enforcement Costs and the Optimal Progressivity of Income Taxes," Journal of Law, Economics and Organization, Oxford University Press, vol. 6(2), pages 410-31, Fall.
  14. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 323-338, November.
  15. Mookherjee, Dilip & Png, Ivan, 1989. "Optimal Auditing, Insurance, and Redistribution," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 399-415, May.
  16. Christiansen, Vidar, 1980. "Two comments on tax evasion," Journal of Public Economics, Elsevier, vol. 13(3), pages 389-393, June.
  17. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  18. Myles, Gareth D. & Naylor, Robin A., 1996. "A model of tax evasion with group conformity and social customs," European Journal of Political Economy, Elsevier, vol. 12(1), pages 49-66, April.
  19. Cowell, F. A., 1992. "Tax evasion and inequity," Journal of Economic Psychology, Elsevier, vol. 13(4), pages 521-543, December.
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