American Institute of Mathematical Sciences

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July  2016, 3(3): 231-260. doi: 10.3934/jdg.2016013

On the evolution of compliance and regulation with tax evading agents

Yannis Petrohilos-Andrianos 1, and  Anastasios Xepapadeas 1,

1. 

Athens University of Economics and Business, Department of International and European Economic Studies, 76 Patission Street, GR 10434 Athens, Greece, Greece

Received  December 2015 Revised  March 2016 Published  July 2016

We study the evolution of compliance and regulation with tax-evading agents, allowing for imitation rather than rationality in the evolution of available strategies distribution in the population. The general framework of the approach combines a classical model for tax evasion where agents are imitators rather than rational optimizers and form an endogenized subjective probability of audit. A regulator chooses values to available policy instruments, either myopically or optimally -within an optimal control setup-, always with respect to the behavior of agents. A comparison is drawn between the evolutionary and rational case in order to evaluate the differences that occur.
Keywords: optimization, replicator dynamics, Tax evasion, regulation..
Mathematics Subject Classification: Primary: 91A22, 91B55; JEL Classification: H26, C7.
Citation: Yannis Petrohilos-Andrianos, Anastasios Xepapadeas. On the evolution of compliance and regulation with tax evading agents. Journal of Dynamics & Games, 2016, 3 (3) : 231-260. doi: 10.3934/jdg.2016013
References:
[1]

M. G. Allingham and A. Sandmo, Income tax evasion: A theoretical analysis,, Journal of public economics, 1 (1972), 323.  doi: 10.1016/0047-2727(72)90010-2.  Google Scholar

[2]

J. Andreoni, B. Erard and J. Feinstein, Tax compliance,, Journal of Economic Literature, 36 (1998), 818.   Google Scholar

[3]

A. Antoci, P. Russu and L. Zarri, Tax evasion in a behaviorally heterogeneous society: An evolutionary analysis,, Economic Modelling, 42 (2014), 106.  doi: 10.1016/j.econmod.2014.06.002.  Google Scholar

[4]

P. Bardsley, Tax Compliance Games with Imperfect Auditing,, Research paper No. 548, (1994).   Google Scholar

[5]

G. S. Becker, Crime and punishment: An economic approach,, Journal of Political Economy, 76 (1968), 169.   Google Scholar

[6]

S. F. Brosnan, N. E. Newton-Fisher and M. Van Vugt, A melding of the minds: When primatology meets personality and social psychology,, Personality and Social Psychology Review, 13 (2009), 129.  doi: 10.1177/1088868309335127.  Google Scholar

[7]

K. P. Chen and C. C. Chu, Internal control versus external manipulation: A model of corporate income tax evasion,, Rand Journal of Economics, 36 (2005), 151.   Google Scholar

[8]

European Commission, Taxation Trends in the European Union. Data for the Member States and Norway - National List of Taxes,, Scientific report, (2009).   Google Scholar

[9]

H. Gintis, Game Theory Evolving: A Problem-Centered Introduction to Modeling Strategic Interaction,, Second edition. Princeton University Press, (2009).   Google Scholar

[10]

M. J. Graetz, J. F. Reinganum and L. L. Wilde, The tax compliance game: Toward an interactive theory of law enforcement,, Journal of Law, 2 (1986), 1.   Google Scholar

[11]

J. Greenberg, Avoiding tax avoidance: A (repeated) game-theoretic approach,, Journal of Economic Theory, 32 (1984), 1.  doi: 10.1016/0022-0531(84)90071-1.  Google Scholar

[12]

M. W. Hirsch and S. Smale, Differential Equations, Dynamical Systems, and Linear Algebra,, Academic Press New York, (1974).   Google Scholar

[13]

J. Hofbauer and K. Sigmund, Evolutionary game dynamics,, Bulletin of the American Mathematical Society, 40 (2003), 479.  doi: 10.1090/S0273-0979-03-00988-1.  Google Scholar

[14]

M. I. Kamien and N. L. Schwartz, Dynamic Optimization: The Calculus of Variations and Optimal Control in Economics and Management,, Second edition. Advanced Textbooks in Economics, (1991).   Google Scholar

[15]

V. Lipatov, Evolution of Tax Evasion,, MPRA Paper No. 966, (2006).   Google Scholar

[16]

J. F. Reinganum and L. L. Wilde, Income tax compliance in a principal-agent framework,, Journal of Public Economics, 26 (1985), 1.  doi: 10.1016/0047-2727(85)90035-0.  Google Scholar

[17]

J. F. Reinganum and L. L. Wilde, Equilibrium verification and reporting policies in a model of tax compliance,, International Economic Review, 27 (1986), 739.  doi: 10.2307/2526692.  Google Scholar

[18]

L. Samuelson, Evolutionary Games and Equilibrium Selection, vol. 1,, The MIT Press, (1997).   Google Scholar

[19]

K. H. Schlag, Why imitate, and if so, how?: A boundedly rational approach to multi-armed bandits,, Journal of Economic Theory, 78 (1998), 130.  doi: 10.1006/jeth.1997.2347.  Google Scholar

[20]

J. Slemrod, An empirical test for tax evasion,, The Review of Economics and Statistics, 67 (1985), 232.  doi: 10.2307/1924722.  Google Scholar

[21]

J. Slemrod and S. Yitzhaki, Tax avoidance, evasion, and administration,, Handbook of Public Economics, 3 (2002), 1423.   Google Scholar

[22]

A. A. Vasin and P. A. Vasina, Tax Optimization Under Tax Evasion: The Role of Penalty Constraints,, Working Paper Series No. 01/09, (2002).   Google Scholar

[23]

W. Wane, Tax Evasion, Corruption, and the Remuneration of Heterogeneous Inspectors,, Policy Research Working Paper No. 2394, (2394).   Google Scholar

[24]

J. W. Weibull, Evolutionary Game Theory,, The MIT Press, (1995).   Google Scholar

[25]

S. Yitzhaki, Income tax evasion: A theoretical analysis,, Journal of Public Economics, 3 (1974), 201.  doi: 10.1016/0047-2727(74)90037-1.  Google Scholar

show all references

References:
[1]

M. G. Allingham and A. Sandmo, Income tax evasion: A theoretical analysis,, Journal of public economics, 1 (1972), 323.  doi: 10.1016/0047-2727(72)90010-2.  Google Scholar

[2]

J. Andreoni, B. Erard and J. Feinstein, Tax compliance,, Journal of Economic Literature, 36 (1998), 818.   Google Scholar

[3]

A. Antoci, P. Russu and L. Zarri, Tax evasion in a behaviorally heterogeneous society: An evolutionary analysis,, Economic Modelling, 42 (2014), 106.  doi: 10.1016/j.econmod.2014.06.002.  Google Scholar

[4]

P. Bardsley, Tax Compliance Games with Imperfect Auditing,, Research paper No. 548, (1994).   Google Scholar

[5]

G. S. Becker, Crime and punishment: An economic approach,, Journal of Political Economy, 76 (1968), 169.   Google Scholar

[6]

S. F. Brosnan, N. E. Newton-Fisher and M. Van Vugt, A melding of the minds: When primatology meets personality and social psychology,, Personality and Social Psychology Review, 13 (2009), 129.  doi: 10.1177/1088868309335127.  Google Scholar

[7]

K. P. Chen and C. C. Chu, Internal control versus external manipulation: A model of corporate income tax evasion,, Rand Journal of Economics, 36 (2005), 151.   Google Scholar

[8]

European Commission, Taxation Trends in the European Union. Data for the Member States and Norway - National List of Taxes,, Scientific report, (2009).   Google Scholar

[9]

H. Gintis, Game Theory Evolving: A Problem-Centered Introduction to Modeling Strategic Interaction,, Second edition. Princeton University Press, (2009).   Google Scholar

[10]

M. J. Graetz, J. F. Reinganum and L. L. Wilde, The tax compliance game: Toward an interactive theory of law enforcement,, Journal of Law, 2 (1986), 1.   Google Scholar

[11]

J. Greenberg, Avoiding tax avoidance: A (repeated) game-theoretic approach,, Journal of Economic Theory, 32 (1984), 1.  doi: 10.1016/0022-0531(84)90071-1.  Google Scholar

[12]

M. W. Hirsch and S. Smale, Differential Equations, Dynamical Systems, and Linear Algebra,, Academic Press New York, (1974).   Google Scholar

[13]

J. Hofbauer and K. Sigmund, Evolutionary game dynamics,, Bulletin of the American Mathematical Society, 40 (2003), 479.  doi: 10.1090/S0273-0979-03-00988-1.  Google Scholar

[14]

M. I. Kamien and N. L. Schwartz, Dynamic Optimization: The Calculus of Variations and Optimal Control in Economics and Management,, Second edition. Advanced Textbooks in Economics, (1991).   Google Scholar

[15]

V. Lipatov, Evolution of Tax Evasion,, MPRA Paper No. 966, (2006).   Google Scholar

[16]

J. F. Reinganum and L. L. Wilde, Income tax compliance in a principal-agent framework,, Journal of Public Economics, 26 (1985), 1.  doi: 10.1016/0047-2727(85)90035-0.  Google Scholar

[17]

J. F. Reinganum and L. L. Wilde, Equilibrium verification and reporting policies in a model of tax compliance,, International Economic Review, 27 (1986), 739.  doi: 10.2307/2526692.  Google Scholar

[18]

L. Samuelson, Evolutionary Games and Equilibrium Selection, vol. 1,, The MIT Press, (1997).   Google Scholar

[19]

K. H. Schlag, Why imitate, and if so, how?: A boundedly rational approach to multi-armed bandits,, Journal of Economic Theory, 78 (1998), 130.  doi: 10.1006/jeth.1997.2347.  Google Scholar

[20]

J. Slemrod, An empirical test for tax evasion,, The Review of Economics and Statistics, 67 (1985), 232.  doi: 10.2307/1924722.  Google Scholar

[21]

J. Slemrod and S. Yitzhaki, Tax avoidance, evasion, and administration,, Handbook of Public Economics, 3 (2002), 1423.   Google Scholar

[22]

A. A. Vasin and P. A. Vasina, Tax Optimization Under Tax Evasion: The Role of Penalty Constraints,, Working Paper Series No. 01/09, (2002).   Google Scholar

[23]

W. Wane, Tax Evasion, Corruption, and the Remuneration of Heterogeneous Inspectors,, Policy Research Working Paper No. 2394, (2394).   Google Scholar

[24]

J. W. Weibull, Evolutionary Game Theory,, The MIT Press, (1995).   Google Scholar

[25]

S. Yitzhaki, Income tax evasion: A theoretical analysis,, Journal of Public Economics, 3 (1974), 201.  doi: 10.1016/0047-2727(74)90037-1.  Google Scholar

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