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An agent-based model of network effects on tax compliance and evasion

  • Andrei, Amanda L.
  • Comer, Kevin
  • Koehler, Matthew
Registered author(s):

    Agent-based models are flexible analytical tools suitable for exploring and understanding complex systems such as tax compliance and evasion. The agent-based model created in this research builds upon two other agent-based models of tax evasion, the Korobow, Johnson, and Axtell (2007) and Hokamp and Pickhardt (2010) models. The model utilizes their rules for taxpayer behavior and apprehension of tax evaders in order to test the effects of network topologies in the propagation of evasive behavior. Findings include that network structures have a significant impact on the dynamics of tax compliance, demonstrating that taxpayers are more likely to declare all their income in networks with higher levels of centrality across the agents, especially when faced with large penalties proportional to their incomes. These results suggest that network structures should be chosen selectively when modeling tax compliance, as different topologies yield different results. Additionally, this research analyzed the special case of a power law distribution and found that targeting highly interconnected individuals resulted in a lower mean gross tax rate than targeting disconnected individuals, due to the penalties inflating the mean gross tax rate in the latter case.

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    Article provided by Elsevier in its journal Journal of Economic Psychology.

    Volume (Year): 40 (2014)
    Issue (Month): C ()
    Pages: 119-133

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    Handle: RePEc:eee:joepsy:v:40:y:2014:i:c:p:119-133
    Contact details of provider: Web page: http://www.elsevier.com/locate/joep

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    1. Montgomery, James D, 1991. "Social Networks and Labor-Market Outcomes: Toward an Economic Analysis," American Economic Review, American Economic Association, vol. 81(5), pages 1407-18, December.
    2. Juan Molero & Francesc Pujol, 2012. "Walking Inside the Potential Tax Evader’s Mind: Tax Morale Does Matter," Journal of Business Ethics, Springer, vol. 105(2), pages 151-162, January.
    3. Andreoni, J. & Erard, B. & Feinstein, J., 1996. "Tax Compliance," Working papers 9610r, Wisconsin Madison - Social Systems.
    4. Brian Erard & Jonathan S. Feinstein, 1994. "Honesty and Evasion in the Tax Compliance Game," RAND Journal of Economics, The RAND Corporation, vol. 25(1), pages 1-19, Spring.
    5. Bruno S. Frey & Benno Torgler, 2006. "Tax Morale and Conditional Cooperation," IEW - Working Papers 286, Institute for Empirical Research in Economics - University of Zurich.
    6. Georg Zaklan & Frank Westerhoff & Dietrich Stauffer, 2008. "Analysing tax evasion dynamics via the Ising model," Papers 0801.2980, arXiv.org.
    7. Sascha Hokamp & Michael Pickhardt, . "Income Tax Evasion in a Society of Heterogeneous Agents – Evidence from an Agent-based Model," Working Papers 201035, Institute of Spatial and Housing Economics, Munster Universitary.
    8. Zaklan, Georg & Lima, F.W.S. & Westerhoff, Frank, 2008. "Controlling tax evasion fluctuations," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(23), pages 5857-5861.
    9. Albin, Peter & Foley, Duncan K., 1992. "Decentralized, dispersed exchange without an auctioneer : A simulation study," Journal of Economic Behavior & Organization, Elsevier, vol. 18(1), pages 27-51, June.
    10. 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.
    11. Robert Axtell, 2007. "What economic agents do: How cognition and interaction lead to emergence and complexity," The Review of Austrian Economics, Springer, vol. 20(2), pages 105-122, September.
    12. repec:cup:cbooks:9780521195331 is not listed on IDEAS
    13. Korobow, Adam & Johnson, Chris & Axtell, Robert, 2007. "An Agent–Based Model of Tax Compliance with Social Networks," National Tax Journal, National Tax Association, vol. 60(3), pages 589-610, September.
    14. Alan P. Kirman, 1992. "Whom or What Does the Representative Individual Represent?," Journal of Economic Perspectives, American Economic Association, vol. 6(2), pages 117-136, Spring.
    15. Alm, James & Sanchez, Isabel & de Juan, Ana, 1995. "Economic and Noneconomic Factors in Tax Compliance," Kyklos, Wiley Blackwell, vol. 48(1), pages 3-18.
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