Citation Context

...ls file tax returns. Half of the OECD countries operate a system in which most wage earners need not file due to exact, cumulative employer withholding, and in other countries the tax authority sends taxpayers a “pre-populated” tax return based on the information they receive from third parties, requiring the taxpayer only to verify that the information is correct. The Positive Theory of Tax Evasion: Models and Tests The Deterrence Model of Tax Evasion The standard framework for considering an individual’s choice of whether and how much to evade taxes is a deterrence model first formulated by Allingham and Sandmo (1972), who adapted Becker’s (1968) model of the economics of crime. In this model, taxpayers decide whether and how much to evade taxes in the same way Joel Slemrod 35 they would approach any risky decision or gamble—by maximizing expected utility—and are influenced by possible legal penalties in just the same way they are influenced by any other contingent cost. Optimal tax evasion depends on the chance of getting caught and penalized, the size of the penalty for evasion, and the individual’s degree of risk aversion. In an intriguing extension of the theory, Yitzhaki (1974) pointed out that if the...

Citation Context

...nd often costlessly executed. This simplification is unlikely to be realistic: even within the United States, where tax collection is considered to be relatively efficient, about 17 percent of income taxes are estimated as unpaid (Slemrod and Yitzhaki, 2000). One particularly important issue, from both theoretical and policymaking perspectives, is understanding the relationship between tax rates and tax evasion. A number of models have evolved to incorporate tax evasion, but these models fail to provide a clear prediction regarding the impact of tax rates on evasion. In the pioneering work of Allingham and Sandmo (1972), the relationship between tax rates and evasion is positive, but this depends on particular assumptions of risk aversion and the punishment for evasion. A broader review of the literature reports that, more generally, theoretical predictions of the effect of tax rates on evasion are highly sensitive to modeling assumptions (Slemrod and Yitzhaki, 2000).1 Furthermore, even if we believe that increased tax rates will encourage greater evasion, there is still a need to assess the magnitude of this effect. Hence, empirically examining the effect of tax rates on evasion would be very useful from th...

Citation Context

...so. These costs arise for various reasons. First, there may be probabilistic ex-post state verification that results in penalties if misreporting is detected, such as random audits on taxpayers (e.g. =-=Allingham and Sandmo, 1972-=-). Second, there may be costs of manipulating information or falsifying a message, such as when a manager has to spend time “cooking the numbers” or otherwise expend costly resources in order to repor...