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Dynamic Tax Evasion with Audits based on Conspicuous Consumption

Rosella Levaggi and Francesco Menoncin ()

Working papers from Società Italiana di Economia Pubblica

Abstract: We solve the problem of a representative agent who maximises the expected present utility of his intertemporal consumption under the as- sumption that an optimal fraction of his wealth is hidden to the tax au- thorities (we show conditions under which evasion is expedient). Evasion affects the capital dynamics in two ways: the growth rate of capital in- creases because some taxes are not paid, but when caught evading the consumer has to pay a fee (proportional to evasion). Consumption can be allocated between ordinary goods and so-called conspicuous goods. The latter are used by the Government for targeting the audit, since they are considered like an indicator of consumer's wealth. In fact, the probabil- ity to be caught is a function of the distance between the actual and the presumed consumption in conspicuous goods. We find a closed form solu- tion to the dynamic optimization problem and show how fiscal and audit parameters affect the optimal evasion and the optimal allocation between the two consumptions.

Keywords: dynamic tax evasion; targeted audits; conspicuous consumption (search for similar items in EconPapers)
JEL-codes: G11 H26 H42 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc, nep-iue and nep-pbe
Date: 2015-10
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