Do High Tax and Tax Evasion go Hand in Hand? The Non-Linear Case

Alain Trannoy and Gwenola Trotin ()
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Gwenola Trotin: EQUIPPE, Université Charles-de-Gaulle Lille 3

No 1004, IDEP Working Papers from Institut d'economie publique (IDEP), Marseille, France

Abstract: This paper fully investigates how a tax rate change can affect tax evasion, under the expected utility theory hypothesis. We generalize the Allingham-Sandmo benchmark model of tax evasion, using very general non-linear specifications for the tax schedule and the fine scheme. We consider both interior and corner solutions in terms of tax evasion. When the fine is imposed on the evaded tax, we examine the robustness of Yitzhaki’s result of a positive relationship between a change in tax rate and undeclared income. When the fine is imposed on the undeclared income, we obtain conditions under which Allingham and Sandmo’s result of a inverse relationship remains valid, and particularly with DARA. The case of an endogenous audit probability is also considered.

Keywords: Tax evasion; Non-linearity; Expected utility theory (search for similar items in EconPapers)
JEL-codes: D81 H26 K42 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2010-07, Revised 2010-07
New Economics Papers: this item is included in nep-acc, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:iep:wpidep:1004

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