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Tax evasion and unaccounted incomes: A theoretical approach

Amey Sapre ()

Working Papers from National Institute of Public Finance and Policy

Abstract: This paper analyzes the problem of tax evasion by incorporating a simple game theoretic framework wherein an individual is confronted with the decision of declaring income for taxation. The model is a re-formulation of Allingham Sandmo (1972) and Srinivasan (1973) original single period decision making problem and extends it to to a repeated game involving a tax payer and a tax authority. The game theoretic results shows that probability of audit and penalty rate are inversely related and that beyond a threshold penalty rate, the tax payer has no incentive to evade. In an infinitely repeated game setting, first, the threat of audit in all future periods acts as a deterrent to evasion and second, the result provides some intuitive understanding of the role of patience and equilibrium strategies in a long repetitive engagement that supports cooperation and prevents deviations.

Keywords: Tax evasion; Repeated game; Public Finance (search for similar items in EconPapers)
JEL-codes: C73 H26 (search for similar items in EconPapers)
Pages: 23
Date: 2019-12
New Economics Papers: this item is included in nep-acc, nep-gth, nep-iue, nep-pbe and nep-pub
Note: Working Paper 289, 2019
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