Abstract
This work studies the dynamics of compliance and optimal auditing in a population of boundedly rational agents who decide whether to engage in tax evasion depending on an evolutionary adaptation process. If they decide to evade taxes, taxpayers can choose different ways to engage in tax evasion and face different auditing probabilities. Moreover, taxpayers make decisions according to the (realistic) principles of Prospect Theory. The analysis studies the intertemporal optimal auditing of a tax authority that targets tax revenues maximization and strategically selects audit probabilities to manage the trade-off created by controlling different modes of evasion with a resource constraint.
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Notes
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See Chetty (2009).
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See also Antoci et al. (2014), Lamantia and Pezzino (2018) where evolutionary dynamics are applied to the study of tax compliance. Pickhardt and Prinz (2014) provide a review of the works that study the behavioral dynamics of tax evasion, with a particular focus on the way interaction among individuals playing different roles (e.g. taxpayers, tax practitioners, tax authorities, etc.) can affect the level of compliance in a population.
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For example, tax authorities tend to distinguish between taxpayers who are employed or self-employed; those whose income is generated by business or non-business activities; those who have filled a tax assessment with or without the support of a tax advisor.
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Frey (1999) shows that in a population there may be taxpayers who simply do not look for opportunities to evade taxes. On similar lines, Long and Swingen (1991) (p. 130) argue that some individuals are not naturally predisposed to evade taxes. This is in line with experimental evidence that shows that some individuals never choose to evade taxes (see Feld and Tyran 2002), even in the absence of enforcement.
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Here we adopt the usual representation for a three-strategy game (a game with one population game and three pure strategies): instead of depicting the shares of the population employing the different pure strategies in the simplex of \(\mathbb {R}^3\), these shares are shown in a two-dimensional equilateral triangle where the vertices correspond to population distributions where all agents employ the same pure strategy and the sides to population distributions where only two pure strategies are adopted.
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De Giovanni, D., Lamantia, F., Pezzino, M. (2020). Evolutionary Tax Evasion, Prospect Theory and Heterogeneous Taxpayers. In: Szidarovszky, F., Bischi, G. (eds) Games and Dynamics in Economics. Springer, Singapore. https://doi.org/10.1007/978-981-15-3623-6_5
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