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Sticks and carrots

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  • Cowell, Frank
Abstract
The tax-payer-as-gambler (TAG) model of tax non-compliance is the classic vehicle for providing some simple insights. Under fairly general conditions this model supports the following four propositions: (1) if the rate of return to evasion is positive everyone evades tax; (2) people with higher risk-aversion tend to evade less; (3) people with higher personal income tend to evade more; (4) increasing any of the standard tax-enforcement parameters (the probability of audit, the proportional surcharge on evaded tax and the tax rate) will reduce the amount of concealed income. Not all of these TAG model predictions seem intuitively reasonable, nor are they all borne out by empirical evidence. There are three principal intellectual routes for a more satisfactory approach: • A re-examination of the underlying model of taxpayer motivation. This encompasses relaxation of the expected-utility assumption, introduction of time into the modeling framework and an extension of the range of arguments of the utility function. • A revision of the model of interaction between the taxpayer and the tax authority. This allows the introduction of an explicit strategic interaction encapsulated in the auditing relationship. Neither the models with precommitment or those without precommitment fully capture the relevant features of the noncompliance problem. Both neglect the problem of “ghosts”. • The role of the modeling of firms. This route is relatively neglected in the theoretical and empirical literature. An elementary treatment of the problem suggests that it has potential as an exploratory tool and as a guide to policy makers.

Suggested Citation

  • Cowell, Frank, 2003. "Sticks and carrots," LSE Research Online Documents on Economics 2046, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:2046
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    File URL: http://eprints.lse.ac.uk/2046/
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    Cited by:

    1. Slemrod, Joel, 2004. "The Economics of Corporate Tax Selfishness," National Tax Journal, National Tax Association;National Tax Journal, vol. 57(4), pages 877-899, December.
    2. Alessandro Santoro & Carlo V. Fiorio, 2011. "Taxpayer Behavior When Audit Rules Are Known: Evidence from Italy," Public Finance Review, , vol. 39(1), pages 103-123, January.
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    4. Crocker, Keith J. & Slemrod, Joel, 2005. "Corporate tax evasion with agency costs," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1593-1610, September.
    5. Carlo Fiorio & Stefano Iacus & Alessandro Santoro, 2013. "Taxpaying response of small firms to an increased probability of audit: some evidence from Italy," Working Papers 251, University of Milano-Bicocca, Department of Economics, revised Jul 2013.
    6. Lindsay M. Tedds, 2005. "Keeping It Off The Books: An Empirical Investigation Into the Characteristics of Firms That Engage In Tax Non-Compliance," Department of Economics Working Papers 2005-01, McMaster University.
    7. Pedro A. Cabra-Acela, 2021. "Rewarding good taxpayers, an effective mechanism?," Documentos CEDE 19419, Universidad de los Andes, Facultad de Economía, CEDE.
    8. Paolo Pellizzari & Dino Rizzi, 2011. "A Multi-Agent Model of Tax Evasion with Public Expenditure," Working Papers 2011_15, Department of Economics, University of Venice "Ca' Foscari".
    9. Simone Pellegrino & Massimiliano Piacenza & Gilberto Turati, 2008. "The Runaway Taxpayer or: Is Prior Tax Notice Effective against Scofflaws?," Working papers 01, Former Department of Economics and Public Finance "G. Prato", University of Torino.
    10. Christou Anna & Eriotis Nikolaos & Lomis Ioannis & Papadakis Spyros & Thalassinos Eleftherios, 2021. "The Greek VAT Gap: The Influence of Individual Economic Sectors," European Research Studies Journal, European Research Studies Journal, vol. 0(4B), pages 851-882.
    11. Isilda Mara & Edlira Narazani, 2011. "The Effects of Flat Tax on Inequality and Informal Employment: The Case of Albania," wiiw Balkan Observatory Working Papers 94, The Vienna Institute for International Economic Studies, wiiw.

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    More about this item

    Keywords

    Compliance; tax evasion; risk taking; enforcement;
    All these keywords.

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents

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