Population dynamics of tax avoidance with crowding effects

Johannes Lorenz ()
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Johannes Lorenz: University of Passau

Journal of Evolutionary Economics, 2019, vol. 29, issue 2, No 3, 609 pages

Abstract: Abstract There are two ways for taxpayers to avoid paying taxes: legal tax optimization and illegal tax evasion. The government reacts by altering the law, and by conducting audits, respectively. These phenomena are modeled as a strategic interaction between all taxpayers: the more taxpayers optimize, the lower the optimization result as a consequence of the government tightening the tax law. The more taxpayers evade, the higher the risk of detection because of the tax agencies increasing the audit probability. It emerges that, in equilibrium, the population shares of optimizers and evaders are not interdependent; rather, they both increase to the detriment of the share of non-optimizing taxpayers. If the government reacts to changed optimization behavior with too large a delay, an equilibrium tax law cannot be reached. Tax codes should be updated rapidly in order to avoid a permanent change of the tax law, which is costly both for the legislator and the taxpayers facing legal uncertainty.

Keywords: Tax evasion; Tax avoidance; Evolutionary game theory; Crowding (search for similar items in EconPapers)
JEL-codes: C73 H26 K34 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s00191-018-0572-6

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