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Income Tax Evasion with Morally Constraint Taxpayers: The Role of Evasion Opportunities and Evasion Cost

  • Ralph-C Bayer


    (School of Economics, University of Adelaide)

This paper re-examines the individual tax-evasion decision. The standard portfolio approach is used to explain why higher tax rates and a higher gross income induce more tax evasion. These empirical facts could not be explained simultaneously with thin the standard framework before. We show these relations can be explained if risk-neutral taxpayers face some evasion cost, such as expenses related to evasion, moral cost or costs of fear. This is true for a very general class of tax and fine scheme. As an example we simulate our model for the German tax system and compare the results with empirical findings.

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Paper provided by University of Adelaide, School of Economics in its series School of Economics Working Papers with number 2003-04.

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Length: 32 pages
Date of creation: 2003
Date of revision:
Handle: RePEc:adl:wpaper:2003-04
Contact details of provider: Postal: Adelaide SA 5005
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  1. Slemrod, Joel & Yitzhaki, Shlomo, 2002. "Tax avoidance, evasion, and administration," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 22, pages 1423-1470 Elsevier.
  2. Matthew Rabin, 2001. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Method and Hist of Econ Thought 0012001, EconWPA.
  3. Christiansen, Vidar, 1980. "Two comments on tax evasion," Journal of Public Economics, Elsevier, vol. 13(3), pages 389-393, June.
  4. 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.
  5. Reinganum, Jennifer F. & Wilde, Louis L., 1985. "Income tax compliance in a principal-agent framework," Journal of Public Economics, Elsevier, vol. 26(1), pages 1-18, February.
  6. 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.
  7. Gordon, James P. P., 1989. "Individual morality and reputation costs as deterrents to tax evasion," European Economic Review, Elsevier, vol. 33(4), pages 797-805, April.
  8. Dubin, Jeffrey A & Graetz, Michael J & Wilde, Louis L, 1987. "Are We a Nation of Tax Cheaters? New Econometric Evidence on Tax Compliance," American Economic Review, American Economic Association, vol. 77(2), pages 240-45, May.
  9. Cremer, Helmuth & Gahvari, Firouz, 1994. " Tax Evasion, Concealment and the Optimal Linear Income Tax," Scandinavian Journal of Economics, Wiley Blackwell, vol. 96(2), pages 219-39.
  10. Bernasconi, Michele, 1998. "Tax evasion and orders of risk aversion," Journal of Public Economics, Elsevier, vol. 67(1), pages 123-134, January.
  11. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  12. 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.
  13. 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.
  14. Cowell, F. A., 1992. "Tax evasion and inequity," Journal of Economic Psychology, Elsevier, vol. 13(4), pages 521-543, December.
  15. Machina, Mark J, 1987. "Choice under Uncertainty: Problems Solved and Unsolved," Journal of Economic Perspectives, American Economic Association, vol. 1(1), pages 121-54, Summer.
  16. Joel Slemrod, 1998. "A General Model of the Behavioral Response to Taxation," NBER Working Papers 6582, National Bureau of Economic Research, Inc.
  17. 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.
  18. repec:att:wimass:9610 is not listed on IDEAS
  19. Colin Camerer, 1998. "Bounded Rationality in Individual Decision Making," Experimental Economics, Springer, vol. 1(2), pages 163-183, September.
  20. James Andreoni & Brian Erard & Jonathan Feinstein, 1998. "Tax Compliance," Journal of Economic Literature, American Economic Association, vol. 36(2), pages 818-860, June.
  21. 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.
  22. Christiansen, Vidar, 1980. "Two Comments on Tax Evasion," Empirical Economics, Springer, vol. 13(3), pages 389-93, June.
  23. Clotfelter, Charles T, 1983. "Tax Evasion and Tax Rates: An Analysis of Individual Returns," The Review of Economics and Statistics, MIT Press, vol. 65(3), pages 363-73, August.
  24. Mookherjee, Dilip & Png, Ivan, 1989. "Optimal Auditing, Insurance, and Redistribution," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 399-415, May.
  25. Chander, Parkash & Wilde, Louis L, 1998. "A General Characterization of Optimal Income Tax Enforcement," Review of Economic Studies, Wiley Blackwell, vol. 65(1), pages 165-83, January.
  26. Bordignon, Massimo, 1993. "A fairness approach to income tax evasion," Journal of Public Economics, Elsevier, vol. 52(3), pages 345-362, October.
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