Moral Constraints and the Evasion of Income Tax

Ralph-C Bayer ()

No 2004-09, School of Economics and Public Policy Working Papers from University of Adelaide, School of Economics and Public Policy

Abstract: 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.

Keywords: tax evasion; risk preferences; moral constraints (search for similar items in EconPapers)
JEL-codes: H26 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2004
References: Add references at CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Moral Constraints and Evasion of Income Tax (2006)
Working Paper: Moral constraints and the evasion of income tax (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:adl:wpaper:2004-09

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