A Tax Evasion Model with Allowance for Retroactive Penalties

J. A. Rickard, A. M. Russell and T. D. Howroyd

The Economic Record, 1982, vol. 58, issue 4, 379-385

Abstract: Discrete models of tax evasion are considered when evasion has occurred over a period of several years. Allowance is made for growth in income, investment of illicit gains from successful evasion, and the imposition of retroactive penalties. Retroactive penalties increase deterrence of evasion if introduced at a point where evasion has been continuing for some years, since the utility gain from continuing successful evasion is unaffected, whereas the utility loss will be increased regardless of attitude to risk. Prohibitive penalty rates are determined, and a range of penalty rates are given in which some dishonest taxpayers may become honest. The formulation of the basic model and consequent conclusions are relevant to the current Australian taxation scene.

Date: 1982
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