A Contest with the Taxman - The Impact of Tax Rates on Tax Evasion and Wastefully Invested Resources

We develop a moral hazard model with auditing where both the principal and the agent can influence the probability that the true state of nature is verified. This setting is widely applicable for situations where fraudulent reporting with costly state verification takes place. However, we use the framework to investigate tax evasion. We model tax evasion as a concealment-detection contest between the taxpayer and the authority. We show that higher tax rates cause more evasion and increase the resources wasted in the contest. Additionally, we find conditions under which a government should enforce incentive compatible auditing in order to reduce wasted resources.tax evasion, auditing rules, contest, moral hazard

Moral Constraints and the Evasion of Income Tax

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.tax evasion, risk preferences, moral constraints

Moral constraints and the evasion of income tax

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.Tax Evasion, Risk Preferences, Moral Constraints

Creating product line architectures

The creation and validation of product line software architectures are inherently more complex than those of software architectures for single systems. This paper compares a process for creating and evaluating a traditional, one-of-a- kind software architecture with one for a reference software architecture. The comparison is done in the context of PuLSE-DSSA, a customizable process that integrates both product line architecture creation and evaluation

The Excess Burden of Tax Evasion: An Experimental Detection-Concealment Contest

We present an experimental study on the wasted resources associated with tax evasion. This waste arises from taxpayers and tax authorities, investing costly effort in concealment, respectively detection, of tax evasion. We show that (socially inefficient) efforts depend positively on the prevailing tax rate, but not on the fine which is imposed in case of detected tax evasion. The frequency of evasion increases with tax rates. Additionally, we observe less tax evasion than a model with risk neutral taxpayers predicts. We find evidence that this is rather due to individual moral constraints than due to risk aversion.tax evasion, contest, experiment, tax rates, fines

Tax Compliance and Firms' Strategic Interdependence

We focus on a relatively neglected area of the tax-compliance literature in economics, the behaviour of firms. We examine the impact of alternative audit rules on receipts from a tax on profits in the context of strategic interdependence of firms. In the market firms may compete in terms of either output or price. The enforcement policy can have an effect on firms' behaviour in two dimensions - their market decisions as well as their compliance behaviour. An appropriate design of the enforcement policy can thus have a "double dividend" by manipulating firms in both dimensions.tax compliance, evasion, oligopoly