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Moral constraints and the evasion of income tax

  • Ralph C Bayer

    (University of Adelaide)

This paper re-examines the individual income tax evasion decision in the simple framework introduced by Allingham and Sandmo (1972), where the individual taxpayer decides how much of his income is invested in a safe asset (reported income) and in a risky asset (concealed income). These early models could not convincingly reproduce the empirically observed positive influence of higher tax rates and higher gross income on tax evasion simultaneously. We replace the standard assumption that risk aversion is the factor limiting the extent of evasion by assuming risk neutral taxpayers and argue that this is a reasonable approximation. The observation that concealing income is costly leads to the conclusion that, instead of risk aversion, evasion costs (such as concealment expenses and moral cost) might be the factors that limit tax evasion. We reproduce the stylized facts not explained by older models for very general tax and penalty schemes, including those where the standard model definitely fails to do so.

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Paper provided by EconWPA in its series Public Economics with number 0412008.

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Date of creation: 14 Dec 2004
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Handle: RePEc:wpa:wuwppe:0412008
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  1. Charness, Gary & Rabin, Matthew, 2001. "Understanding Social Preferences with Simple Tests," Department of Economics, Working Paper Series qt4qz9k8vg, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  2. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
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  8. 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.
  9. 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.
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  11. Christiansen, Vidar, 1980. "Two comments on tax evasion," Journal of Public Economics, Elsevier, vol. 13(3), pages 389-393, June.
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  13. 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.
  14. Bernasconi, Michele, 1998. "Tax evasion and orders of risk aversion," Journal of Public Economics, Elsevier, vol. 67(1), pages 123-134, January.
  15. Kachelmeier, Steven J & Shehata, Mohamed, 1992. "Examining Risk Preferences under High Monetary Incentives: Experimental Evidence from the People's Republic of China," American Economic Review, American Economic Association, vol. 82(5), pages 1120-41, December.
  16. 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.
  17. Mookherjee, Dilip & Png, Ivan, 1989. "Optimal Auditing, Insurance, and Redistribution," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 399-415, May.
  18. Cowell, F. A., 1992. "Tax evasion and inequity," Journal of Economic Psychology, Elsevier, vol. 13(4), pages 521-543, December.
  19. 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.
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