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...tors also may influence taxpayers’ decision to evade. One, taxpayers with high borrowing constraints (compliance opportunity costs) may be more likely to evade, ceteris paribus, than other taxpayers (=-=Andreoni, 1992-=-). Two internal IRS studies find that auditors detect only $1 of every $3 of unreported income not covered by information reporting (IRS, 1996). To account for these factors, TCS modifies the cost com...

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...vable criteria (such as income) would have suggested so. Similarly, taxpayers may experience different circumstances. For example, it has been suggested that cheating taxpayers are in fact worse off (=-=Andreoni 1992-=-), and they treat the IRS as a sort of lender of a last resort. If this were the real reason for most tax evasion and avoidance, horizontal inequity would not in fact be a valid concern. Empirical wor...

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... is a frequent problem with tax data. Accordingly, we use the natural logarithm of the tax bases to account for this feature of our data. Such transformations are common in prior research (Martinez-Vazquez and Rider, 2005; Joulfaian and Rider, 2004; Sobel and Holcombe, 1996). While these transformations are benefi cial, the condition-specifi c means are only useful for comparisons among 7 We believe that changes in fi rm revenues may also impact reporting behavior. That is, taxpayers who have decreasing revenues may behave differently than taxpayers who have increasing revenues. For instance, Andreoni (1992) suggests that the IRS may inadvertently take the role of a high risk lender for taxpayers facing binding borrowing and liquidity constraints, such as when current revenue is decreasing; see Fishlow and Friedman (1994) for similar conclusion. Rice (1992) fi nds that managers of corporations whose profi t performance falls short of targets may resort to noncompliance as a means of shaving costs. The economic model of Fishlow and Friedman (1994) also demonstrates that negative shocks to current income will increase evasion. There were 115 fi rms that had declining gross revenue and 142 that had ...

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... tax evasion undesirable in thesabsence of borrowing constraints, it could become desirable if a borrowing constraint is binding. Taxsevasion, therefore, m a y be a high-risk substitute for a loan." (=-=Andreoni 1992-=-, 35-36). The same argumentscan apply to firms and hence its inclusion in this analysis.s128sP h D Thesis - L.M. Tedds McMaster - Economicssregulations. If these issues are perceived by the firm as af...

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...evasion decision (Baldry (1986)). It also neglects the importance of social factors as emphasised by the findings of Spicer and Lundstedt (1976)4. To overcome 1 An alternative view on this issue is given in Pestieau et al (1994). 2 The revenue service may also try to influence perceptions about the chance of being caught by, for example, prosecuting a small number of "celebrity" cases which are guaranteed publicity. It may be possible to model this but the present paper works on the basis of objective probability assessments. For discussion of evidence on this, see Alm et al (1992). 3 Such as Andreoni (1992), Cremer, Marchand and Pestieau (1990), Reinganum and Wilde (1986), and Sanchez and Sobel (1993). 4 Fuller discussion of these issues can be found in Cowell (1990) and Myles (1995). 3 this, Gordon (1989) and Myles and Naylor (1995) have modified the AllinghamSandmo framework by including social customs into the tax evasion decision. With this modification, a decision to evade brings both the possibility of a fine if caught evading but also the loss of the social custom utility. This specification is sufficiently flexible to lead to results consistent with observed evidence and captures in a si...