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

On the evolution of compliance and regulation with tax evading agents

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.
Citation: Yannis Petrohilos-Andrianos, Anastasios Xepapadeas. On the evolution of compliance and regulation with tax evading agents. Journal of Dynamics and 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), 323-338. doi: 10.1016/0047-2727(72)90010-2.

[2]

J. Andreoni, B. Erard and J. Feinstein, Tax compliance, Journal of Economic Literature, 36 (1998), 818-860.

[3]

A. Antoci, P. Russu and L. Zarri, Tax evasion in a behaviorally heterogeneous society: An evolutionary analysis, Economic Modelling, 42 (2014), 106-115. doi: 10.1016/j.econmod.2014.06.002.

[4]

P. Bardsley, Tax Compliance Games with Imperfect Auditing, Research paper No. 548, The University of Melbourne Department of Economics, 1994.

[5]

G. S. Becker, Crime and punishment: An economic approach, Journal of Political Economy, 76 (1968), 169-217.

[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), 129-147. doi: 10.1177/1088868309335127.

[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), 151-164.

[8]

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

[9]

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

[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, Economics, & Organization, 2 (1986), 1-32.

[11]

J. Greenberg, Avoiding tax avoidance: A (repeated) game-theoretic approach, Journal of Economic Theory, 32 (1984), 1-13. doi: 10.1016/0022-0531(84)90071-1.

[12]

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

[13]

J. Hofbauer and K. Sigmund, Evolutionary game dynamics, Bulletin of the American Mathematical Society, 40 (2003), 479-519. doi: 10.1090/S0273-0979-03-00988-1.

[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, 31. North-Holland Publishing Co., Amsterdam, 1991.

[15]

V. Lipatov, Evolution of Tax Evasion, MPRA Paper No. 966, European University Institute, 2006.

[16]

J. F. Reinganum and L. L. Wilde, Income tax compliance in a principal-agent framework, Journal of Public Economics, 26 (1985), 1-18. doi: 10.1016/0047-2727(85)90035-0.

[17]

J. F. Reinganum and L. L. Wilde, Equilibrium verification and reporting policies in a model of tax compliance, International Economic Review, 27 (1986), 739-760. doi: 10.2307/2526692.

[18]

L. Samuelson, Evolutionary Games and Equilibrium Selection, vol. 1, The MIT Press, Cambridge, MA, 1997.

[19]

K. H. Schlag, Why imitate, and if so, how?: A boundedly rational approach to multi-armed bandits, Journal of Economic Theory, 78 (1998), 130-156. doi: 10.1006/jeth.1997.2347.

[20]

J. Slemrod, An empirical test for tax evasion, The Review of Economics and Statistics, 67 (1985), 232-238. doi: 10.2307/1924722.

[21]

J. Slemrod and S. Yitzhaki, Tax avoidance, evasion, and administration, Handbook of Public Economics, 3 (2002), 1423-1470.

[22]

A. A. Vasin and P. A. Vasina, Tax Optimization Under Tax Evasion: The Role of Penalty Constraints, Working Paper Series No. 01/09, EERC Research Network, Russia and CIS, 2002.

[23]

W. Wane, Tax Evasion, Corruption, and the Remuneration of Heterogeneous Inspectors, Policy Research Working Paper No. 2394, World Bank, 2000.

[24]

J. W. Weibull, Evolutionary Game Theory, The MIT Press, Cambridge, MA, 1995.

[25]

S. Yitzhaki, Income tax evasion: A theoretical analysis, Journal of Public Economics, 3 (1974), 201-202. doi: 10.1016/0047-2727(74)90037-1.

show all references

References:
[1]

M. G. Allingham and A. Sandmo, Income tax evasion: A theoretical analysis, Journal of public economics, 1 (1972), 323-338. doi: 10.1016/0047-2727(72)90010-2.

[2]

J. Andreoni, B. Erard and J. Feinstein, Tax compliance, Journal of Economic Literature, 36 (1998), 818-860.

[3]

A. Antoci, P. Russu and L. Zarri, Tax evasion in a behaviorally heterogeneous society: An evolutionary analysis, Economic Modelling, 42 (2014), 106-115. doi: 10.1016/j.econmod.2014.06.002.

[4]

P. Bardsley, Tax Compliance Games with Imperfect Auditing, Research paper No. 548, The University of Melbourne Department of Economics, 1994.

[5]

G. S. Becker, Crime and punishment: An economic approach, Journal of Political Economy, 76 (1968), 169-217.

[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), 129-147. doi: 10.1177/1088868309335127.

[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), 151-164.

[8]

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

[9]

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

[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, Economics, & Organization, 2 (1986), 1-32.

[11]

J. Greenberg, Avoiding tax avoidance: A (repeated) game-theoretic approach, Journal of Economic Theory, 32 (1984), 1-13. doi: 10.1016/0022-0531(84)90071-1.

[12]

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

[13]

J. Hofbauer and K. Sigmund, Evolutionary game dynamics, Bulletin of the American Mathematical Society, 40 (2003), 479-519. doi: 10.1090/S0273-0979-03-00988-1.

[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, 31. North-Holland Publishing Co., Amsterdam, 1991.

[15]

V. Lipatov, Evolution of Tax Evasion, MPRA Paper No. 966, European University Institute, 2006.

[16]

J. F. Reinganum and L. L. Wilde, Income tax compliance in a principal-agent framework, Journal of Public Economics, 26 (1985), 1-18. doi: 10.1016/0047-2727(85)90035-0.

[17]

J. F. Reinganum and L. L. Wilde, Equilibrium verification and reporting policies in a model of tax compliance, International Economic Review, 27 (1986), 739-760. doi: 10.2307/2526692.

[18]

L. Samuelson, Evolutionary Games and Equilibrium Selection, vol. 1, The MIT Press, Cambridge, MA, 1997.

[19]

K. H. Schlag, Why imitate, and if so, how?: A boundedly rational approach to multi-armed bandits, Journal of Economic Theory, 78 (1998), 130-156. doi: 10.1006/jeth.1997.2347.

[20]

J. Slemrod, An empirical test for tax evasion, The Review of Economics and Statistics, 67 (1985), 232-238. doi: 10.2307/1924722.

[21]

J. Slemrod and S. Yitzhaki, Tax avoidance, evasion, and administration, Handbook of Public Economics, 3 (2002), 1423-1470.

[22]

A. A. Vasin and P. A. Vasina, Tax Optimization Under Tax Evasion: The Role of Penalty Constraints, Working Paper Series No. 01/09, EERC Research Network, Russia and CIS, 2002.

[23]

W. Wane, Tax Evasion, Corruption, and the Remuneration of Heterogeneous Inspectors, Policy Research Working Paper No. 2394, World Bank, 2000.

[24]

J. W. Weibull, Evolutionary Game Theory, The MIT Press, Cambridge, MA, 1995.

[25]

S. Yitzhaki, Income tax evasion: A theoretical analysis, Journal of Public Economics, 3 (1974), 201-202. doi: 10.1016/0047-2727(74)90037-1.

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