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Sticks and Carrots

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Author Info
Frank A Cowell

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Abstract

The tax-payer-as-gambler (TAG) model of tax non-compliance is the classic vehicle for providing some simple insights. Under fairly general conditions this model supports the following four propositions: (1) if the rate of return to evasion is positive everyone evades tax; (2) people with higher risk-aversion tend to evade less; (3) people with higher personal income tend to evade more; (4) increasing any of the standard tax-enforcement parameters (the probability of audit, the proportional surcharge on evaded tax and the tax rate) will reduce the amount of concealed income. Not all of these TAG model predictions seem intuitively reasonable, nor are they all borne out by empirical evidence.There are three principal intellectual routes for a more satisfactory approach:(a)A re-examination of the underlying model of taxpayer motivation. This encompasses relaxation of the expected-utility assumption, introduction of time into the modeling framework and an extension of the range of arguments of the utility function.(b)A revision of the model of interaction between the taxpayer and the tax authority. This allows the introduction of an explicit strategic interaction encapsulated in the auditing relationship. Neither the models with precommitment or those without precommitment fully capture the relevant features of the noncompliance problem. Both neglect the problem of "ghosts".(c)The role of the modeling of firms. This route is relatively neglected in the theoretical and empirical literature. An elementary treatment of the problem suggests that it has potential as an exploratory tool and as a guide to policy makers.

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Paper provided by Suntory and Toyota International Centres for Economics and Related Disciplines, LSE in its series STICERD - Distributional Analysis Research Programme Papers with number 68.

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Date of creation: Mar 2003
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Handle: RePEc:cep:stidar:68

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Keywords: Compliance; tax evasion; risk-taking; enforcement.;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  3. Robin Boadway & Motohiro Sato, 2000. "The Optimality of Punishing Only the Innocent: The Case of Tax Evasion," International Tax and Public Finance, Springer, vol. 7(6), pages 641-664, December. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Tedds, Lindsay, 2007. "Keeping it off the Books: An Empirical Investigation of Firms that Engage in Tax Evasion," MPRA Paper 4213, University Library of Munich, Germany. [Downloadable!]
  2. Keith J. Crocker & Joel Slemrod, 2004. "Corporate Tax Evasion with Agency Costs," NBER Working Papers 10690, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Joel Slemrod, 2004. "The Economics of Corporate Tax Selfishness," NBER Working Papers 10858, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Koziarivska Larysa & Oliinyk Andrii, 2006. "Effects of the 2004 Personal Income Tax System Reform on the Shadow Sector in Ukraine," EERC Working Paper Series 06-08e, EERC Research Network, Russia and CIS. [Downloadable!]
  5. Lindsay M. Tedds, 2005. "Keeping It Off The Books: An Empirical Investigation Into the Characteristics of Firms That Engage In Tax Non-Compliance," Department of Economics Working Papers 2005-01, McMaster University. [Downloadable!]
  6. Simone Pellegrino & Massimiliano Piacenza & Gilberto Turati, 2008. "The Runaway Taxpayer or: Is Prior Tax Notice Effective against Scofflaws?," Working Papers 1, University of Torino, Department of Economics and Public Finance "G. Prato". [Downloadable!]
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