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A Multi-Agent Model of Tax Evasion with Public Expenditure


  • Paolo Pellizzari

    () (Department of Economics, University Of Venice C� Foscari)

  • Dino Rizzi

    (Department of Economics, University Of Venice C� Foscari)


We develop a model where heterogeneous agents maximize their individual utility based on (after tax) income and on the level of public expenditure (as in Cowell, Gordon, 1988). Agents are different in risk aversion and in the relative preference for public expenditure with respect to personal income. In each period, an agent can optimally conceal some income based on conjectures on the perceived probability of being subject to audits, the perceived level of public expenditure and the perceived amount of tax paid by other individuals. As far as the agent-based model is concerned, we assume that the Government sets the tax rate and the penalties, uses all the revenue to finance public expenditure (with no inefficiency) and fights evasion by controlling a (random) fraction of agents. We show that, through computational experiments based on micro-simulations, stable configurations of tax rates and public expenditure endogenously form in this case as well. In such equilibrium-like situations we find: � a positive relationship between the tax rate and evasion still arises. � tax compliance mainly depends on the distribution of personal features like risk-aversion and the degree of preference for public expenditure. � an endogenous level of tax evasion that is almost not affected by reasonable rates of control. A proper choice of the tax rate results instead in voluntary partial compliance. � the enforcement of higher compliance rates requires unrealistic and costly large-scale audits.

Suggested Citation

  • Paolo Pellizzari & Dino Rizzi, 2011. "A Multi-Agent Model of Tax Evasion with Public Expenditure," Working Papers 2011_15, Department of Economics, University of Venice "Ca' Foscari".
  • Handle: RePEc:ven:wpaper:2011_15

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    References listed on IDEAS

    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. Georg Zaklan & Frank Westerhoff & Dietrich Stauffer, 2009. "Analysing tax evasion dynamics via the Ising model," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 4(1), pages 1-14, June.
    3. Pyle, D J, 1991. " The Economics of Taxpayer Compliance," Journal of Economic Surveys, Wiley Blackwell, vol. 5(2), pages 163-198.
    4. Sascha Hokamp & Michael Pickhardt, 2010. "Income Tax Evasion in a Society of Heterogeneous Agents - Evidence from an Agent-based Model," International Economic Journal, Taylor & Francis Journals, vol. 24(4), pages 541-553.
    5. Sandmo, Agnar, 2005. "The Theory of Tax Evasion: A Retrospective View," National Tax Journal, National Tax Association, vol. 58(4), pages 643-663, December.
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    Cited by:

    1. Pickhardt, Michael & Seibold, Goetz, 2014. "Income tax evasion dynamics: Evidence from an agent-based econophysics model," Journal of Economic Psychology, Elsevier, vol. 40(C), pages 147-160.

    More about this item


    Tax evasion; public expenditure; agent-based models;

    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H40 - Public Economics - - Publicly Provided Goods - - - General
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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