The economics of income tax evasion
This thesis consists of three extended essays on the evasion of income tax. The main purpose of this thesis is to refine the existing tax evasion models in a way that makes it possible to explain empirically established stylized facts that could not be explained before. In the first part we use a standard neoclassical framework in order to analyse the impact of risk preferences on evasion behaviour. We argue that expected value maximization with some fixed and variable costs incurred during the evasion process (moral cost, cost of coverage action etc.) is an appropriate framework to explain the stylised fact that higher tax rates and a higher income lead to more tax evasion. This resolves one of the puzzles concerning tax evasion that was unsolved so far. The second part uses this finding to examine the effect of tax rates on the resources wasted during the process of tax sheltering and evasion detection. We model a declaration detection process, where both, tax inspector and taxpayer, can invest into the probability that the true income from different potential income sources is verified We show that in this contest a higher tax rate leads to more resources that are waste- fully invested in the cat and dog play between authority and taxpayer. The positive effect of rising tax rates and rising income on tax evasion is maintained. The final part of the thesis explains why the tax authority in reality audits sequentially. I.e. it audits single sources at the beginning to conduct a full-scale audit, whenever it finds evidence for irregularities. To do so, we use a simplified version of the model from part two and allow for sequential auditing as well as for different types of taxpayers. The possibility to learn something about the type of the taxpayer by auditing sequentially gives the authority a powerful tool to better target its detection effort. Sequential auditing therefore reduces the amount of non-filers and black market participants as well as the probability that somebody evades a fraction of his total income.