Tax Avoidance and Tax Evasion as a Joint Portfolio Choice

This paper analyzes the individual's decisions when illegal tax evasion and legal tax avoidance are simultaneously available and when both yield uncertain returns. His decisions are assumed to depend upon the means, variances, and covariances of the returns. One conclusion is that a decrease in the return to risky incomes, or an increase in its variance, increases the income tax base. Also, the individual substitutes between avoidance and evasion in a way that depends upon changes in their relative returns and risks. Consequently, government gains from complexity and uncertainity in the tax code because its tax revenues increase.