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Tax compliance with uncertain income: a stochastic control model

Author

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  • Gaetano T. Spartà

    (Sapienza-Università di Roma)

  • Gabriele Stabile

    (Sapienza-Università di Roma)

Abstract

This paper examines the compliance behaviour of a taxpayer endowed with a stochastic income, taking into account dynamical factors as public and private investments, within a stochastic control framework. Assuming logarithmic utilities and thanks to a suitable rewrite of the problem, we provide an existence and uniqueness result for the solution of the Hamilton–Jacobi–Bellman equation associated to the control problem, and we rely on a symbolic and numerical algorithm to study its solution. Moreover, we implement a Monte Carlo simulation in order to determine an estimate of the mean and the variance of the total declared income together with a confidence interval. To illustrate how the method works, we present a computational example where we assign values to the parameters. In this case we perform a sensitivity analysis, showing how the total declared income is affected by public and private investments, probability of being discovered, fine, tax rate and income uncertainty.

Suggested Citation

  • Gaetano T. Spartà & Gabriele Stabile, 2018. "Tax compliance with uncertain income: a stochastic control model," Annals of Operations Research, Springer, vol. 261(1), pages 289-301, February.
    • Handle: RePEc:spr:annopr:v:261:y:2018:i:1:d:10.1007_s10479-017-2618-9
    DOI: 10.1007/s10479-017-2618-9
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    References listed on IDEAS

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