Do High Tax and Tax Evasion go Hand in Hand? The Non-Linear Case
This paper fully investigates how a tax rate change can affect tax evasion, under the expected utility theory hypothesis. We generalize the Allingham-Sandmo benchmark model of tax evasion, using very general non-linear specifications for the tax schedule and the fine scheme. We consider both interior and corner solutions in terms of tax evasion. When the fine is imposed on the evaded tax, we examine the robustness of Yitzhaki’s result of a positive relationship between a change in tax rate and undeclared income. When the fine is imposed on the undeclared income, we obtain conditions under which Allingham and Sandmo’s result of a inverse relationship remains valid, and particularly with DARA. The case of an endogenous audit probability is also considered.
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- Ralph-C Bayer, 2003. "A Contest with the Taxman: The Impact of Tax Rates on Tax Evasion and Wastefully Invested Resources," School of Economics Working Papers 2003-06, University of Adelaide, School of Economics.
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