The Analysis of Tax Evasion

Document details
Category: Economics Essay
Subcategory: Political Economics
Words: 681
Pages: 2

Ever since Allingham and Sandmo (1972) created their model, many pieces of literature have come to view on the analysis of tax evasion. These works have explained the behavior of a single underreporting agent. However, many papers do not include the extent to which one takes part in tax evasion. Clotfelter (1983) stated that the extent to which one evades taxes is strongly correlated with the source of ones income. Other papers reveal that the opportunity for tax evasion differs among occupations and these differences affect the labor market behavior of the agent. Other papers like that of the Watson (1985) model have included a two-sector model. In one sector, evasion is evadable while in the other evasion is non-evadable. In this paper, Yung strongly mimics Watsons two sector model. The only difference is that Yung proves that a rise in the tax rate increases the participation in the underground economy if and only if agents preferences for risk-bearing exhibit increasing relative risk aversion (IRRA).This paper fits in to the topic area by looking at the different aspects of tax evasion. They use other pieces of literature including Allingham and Sandmos model to make their analysis of how appealing tax evasion can be. As stated before, Yung strongly mimics the Watson model. He does this in order to demonstrate the fact that agents will maximize expected utility as given the governments use of a particular tax-collection technology. There is a constant tax rate on declared income as well as the probability of detection if declared income is less than the actual income. The paper also includes Watsons two sectors for when an agent decides to evade. The only difference from Watsons model is the fact that if an agent is detected, the penalty is a multiple of the amount of tax evaded instead of a multiple of undeclared income. Yung also states that when the government changes their variables (t and p), relative attractiveness of...

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