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Moral constraints and the evasion of income tax

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  • Ralph C Bayer

    (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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Bibliographic Info

Paper provided by EconWPA in its series Public Economics with number 0412008.

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Date of creation: 14 Dec 2004
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Handle: RePEc:wpa:wuwppe:0412008

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Keywords: Tax Evasion; Risk Preferences; Moral Constraints;

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  1. 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.
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  12. 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.
  13. 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.
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  15. 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.
  16. Christiansen, Vidar, 1980. "Two comments on tax evasion," Journal of Public Economics, Elsevier, vol. 13(3), pages 389-393, June.
  17. Colin Camerer, 1998. "Bounded Rationality in Individual Decision Making," Experimental Economics, Springer, vol. 1(2), pages 163-183, September.
  18. Mookherjee, Dilip & Png, Ivan, 1989. "Optimal Auditing, Insurance, and Redistribution," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 399-415, May.
  19. Christiansen, Vidar, 1980. "Two Comments on Tax Evasion," Empirical Economics, Springer, vol. 13(3), pages 389-93, June.
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