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Do High Tax and Tax Evasion go Hand in Hand? The Non-Linear Case

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Author Info

  • Alain Trannoy

    ()
    (EHESS, Greqam-Idep)

  • Gwenola Trotin

    ()
    (EQUIPPE, Université Charles-de-Gaulle Lille 3)

Abstract

This paper fully investigates how a tax rate change can affect tax evasion, under the expected utility theory hypothesis. We generalize the Allingham-Sandmo benchmark model of tax evasion, using very general non-linear specifications for the tax schedule and the fine scheme. We consider both interior and corner solutions in terms of tax evasion. When the fine is imposed on the evaded tax, we examine the robustness of Yitzhaki’s result of a positive relationship between a change in tax rate and undeclared income. When the fine is imposed on the undeclared income, we obtain conditions under which Allingham and Sandmo’s result of a inverse relationship remains valid, and particularly with DARA. The case of an endogenous audit probability is also considered.

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Bibliographic Info

Paper provided by Institut d'economie publique (IDEP), Marseille, France in its series IDEP Working Papers with number 1004.

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Length: 17 pages
Date of creation: Jul 2010
Date of revision: Jul 2010
Handle: RePEc:iep:wpidep:1004

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Keywords: Tax evasion; Non-linearity; Expected utility theory;

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References

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  1. Ralph-C Bayer, 2004. "A Contest with the Taxman - The Impact of Tax Rates on Tax Evasion and Wastefully Invested Resources," School of Economics Working Papers 2004-11, University of Adelaide, School of Economics.
  2. Pierre-André Chiappori & Monica Paiella, 2008. "Relative Risk Aversion Is Constant: Evidence from Panel Data," Discussion Papers 5_2008, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy.
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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Tax Evasion Numbers
    by Ariel Goldring in Free Market Mojo on 2010-08-19 12:24:55
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Cited by:
  1. Amedeo Piolatto & Gwenola Trotin, 2011. "Optimal tax enforcement under prospect theory," Working Papers 2011/29, Institut d'Economia de Barcelona (IEB).

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