An evasive topic: theorizing about the hidden economy

Abstract

This paper reviews some central issues that arise in theorizing about tax evasion decisions and the hidden economy. It starts from the Allingham-Sandmo (1972) modelling of the tax evasion decision as a choice under uncertainty based on expected utility maximization and risk aversion. It goes on to discuss alternative specifications of the taxpayer's preferences with particular regard to the explanation of the extensive margin, i.e. the decision on whether or not to engage in tax evasion. It extends the model to the case of variable labour supply with work in both official and black labour markets. It then considers the application of the theory to taxes on wealth and income from capital, indirect tax evasion and smuggling. It also includes a consideration of general equilibrium effects and of the problems that evasion causes for the theory of optimal income and commodity taxes. It concludes with a brief discussion of the implications of tax evasion for economic policy in the welfare state.

You've Got Mail: A Randomised Field Experiment on Tax Evasion

“…We here provide a simple model of taxpayer behavior to guide our analysis and the interpretation of the results, building on Cappelen et al (2007); Sandmo (2012) .…”

Work and tax evasion incentive effects of social insurance programs

“…In many studies, emphasis has been placed on the financial incentive effects of labor force participation. The effects of responses on additional margins such as registered and unregistered employment and on underreporting of earnings to evade payroll taxes has received less attention (Slemrod and Yitzhaki, 2002;Sandmo, 2012;Slemrod and Weber, 2012). Understanding what leads firms and their employees to register with the formal system and to declare their true income to the government are first order public finance issues for most economies around the world.…”

Tax evasion, labor market effects, and income distribution

“…The originators of the standard approach to tax evasion applied the economics of crime model directly to tax evasion [2] (see [4] for a recent assessment). The basic model is essentially a portfolio approach in which a rational individual compares the expected utility of being detected and paying a penalty for tax evasion to the expected utility of being able to keep the evaded tax income.…”