Skip to main content
SpringerLink
Log in

Taxation, Black Markets, and Other Unintended Consequences

  • Chapter
Book cover Handbook of Public Finance

Abstract

The economics of tax evasion and tax avoidance is shortly presented, and the relevant literature is surveyed. Starting from the income tax and the standard portfolio choice model, the perspective is enlarged by adding further circumstances (e.g., labor supply, indirect taxation) and by studying optimal enforcement policies. To understand the taxpayer’s behavior, the contribution of new theoretical perspectives (e.g., first order risk aversion, network externalities) is examined. Topics pertaining to moral, social and political implications of tax evasion are considered.

I wish to thank Luigi Alberto Franzoni, Mario Ferrero, Federico Revelli and Roberto Zanola for useful remarks and suggestions. The usual disclaimer applies.

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Log in via an institution
Chapter
USD 29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD 259.00
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
Softcover Book
USD 329.99
Price excludes VAT (USA)
  • Compact, lightweight edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info
Hardcover Book
USD 329.99
Price excludes VAT (USA)
  • Durable hardcover edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  • Allingham, M. G. and Sandmo, A. (1972). “Income Tax evasions: a Theoretical Analysis.” Journal of Public Economics 1: 323–338.

    Article  Google Scholar 

  • Alm, J. (1988). “Compliance Costs and the Tax Avoidance-Tax Evasion Decision.” Public Finance Quarterly 16: 31–66.

    Google Scholar 

  • Alm, J., Jackson, B. R., and McKee, M. (1993). “Fiscal Exchange, Collective Decision Institutions, and Tax Compliance.” Journal of Economic Behavior and Organization 22: 285–303.

    Article  Google Scholar 

  • Alm, J. and McCallin, N. J. (1990). “Tax Avoidance and Tax Evasion As a Joint Portfolio Choice.” Public Finance 45: 193–200.

    Google Scholar 

  • Alm, J., McClelland, G. H., and Schulze, W. D. (1992). “Why Do People Pay Taxes?“ Journal of Public Economics 48: 21–38.

    Article  Google Scholar 

  • Andreoni, J. (1991). “Reasonable Doubt and the Optimal Magnitude of Fines: Should the Penalty Fit the Crime?“ Rand Journal of Economics 22: 385–395.

    Google Scholar 

  • Andreoni, J., Erard, B., and Feinstein, J. (1998). “Tax Compliance.” Journal of Economic Literature 36: 818–860.

    Google Scholar 

  • Baron, D. P. and Besanko, D. (1984). “Regulation, Asymmetric Information and Auditing.” Rand Journal of Economics 5: 447–470.

    Google Scholar 

  • Baumol, W. J. (1990). “Entrepreneurship: Productive, Unproductive, and Destructive.” Journal of Political Economy 98 (Part 1): 893–921.

    Google Scholar 

  • Becker, G. S. (1968). “Crime and Punishment: an Economic Approach.” Journal of Political Economy 76: 169–217.

    Google Scholar 

  • Bernasconi, M. (1998). “Tax Evasion and Orders of Risk Aversion.” Journal of Public Economics 67: 123–134.

    Article  Google Scholar 

  • Besley, T., Preston, I., and Ridge, M. (1997). “Fiscal Anarchy in the UK: Modelling Poll Tax Noncompliance.” Journal of Public Economics 64: 137–152.

    Article  Google Scholar 

  • Boadway, R. and Sato, M. (2000). “The Optimality of Punishing Only the Innocent: the Case of Tax Evasion.” International Tax and Public Finance 7: 641–664.

    Article  Google Scholar 

  • Border, K. C. and Sobel, J. (1987). “Samurai Accountant: a Theory of Auditing and Plunder.” Review of Economic Studies 54: 525–540.

    MathSciNet  Google Scholar 

  • Bordignon, M. (1993). “A Fairness Approach to Income Tax Evasion.” Journal of Public Economics 52: 345–362.

    Article  Google Scholar 

  • Buchanan, J. M. and Congleton, R. D. (1998). Politics By Principle, Not Interest: Toward Nondiscriminatory Democracy. Cambridge: Cambridge University Press.

    Google Scholar 

  • Buchanan, J. M. and Faith, R. L. (1987). “Secession and the Limits of Taxation: Toward a Theory of Internal Exit.” American Economic Review 77: 1023–1031.

    Google Scholar 

  • Burgess, R. and Sternn, N. (1993). “Taxation and Development.” Journal of Economic Literature 31: 762–830.

    Google Scholar 

  • Brito, D. L. et al. (1995). “Randomization in Optimal Income Tax Schedules.” Journal of Public Economics 56: 189–223.

    Article  Google Scholar 

  • Camerer, C. F. and Ho, T. H. (1994). “Violations of the Betweenness Axiom and Nonlinearity in Probability.” Journal of Risk and Uncertainty 8: 167–196.

    Article  Google Scholar 

  • Cecchetti, G. S. and Mark, N. C. (1990). “Evaluating Empirical Tests of Asset Pricing Models: Alternative Interpretations.” American Economic Review Papers and Proceedings 80: 48–51.

    Google Scholar 

  • Chander, P. and Wilde, L. (1992). “Corruption in Tax Administration.” Journal of Public Economics 49: 333–349.

    Article  Google Scholar 

  • Chander, P. and Wilde, L. L. (1998). “A General Characterization of Optimal Income Tax Enforcement.” Review of Economic Studies 65: 165–183.

    Article  MathSciNet  Google Scholar 

  • Clotfelter, C. T. (1983).“Tax Evasion and Tax Rates: an Analysis of Individual Returns.” Review of Economics and Statistics 65: 363–373.

    Google Scholar 

  • Cowell, F. A. (1985). “Tax Evasion with Labour Income.” Journal of Public Economics 26: 19–34.

    Article  Google Scholar 

  • Cowell, F. A. (1990). Cheating the Government. Cambridge, MA: MIT Press.

    Google Scholar 

  • Cowell, F. A. and Gordon, J. P. F. (1995). “Auditing with ‘Ghosts’.” In The economics of organised crime, Fiorentini, G. and Peltzman, S., eds., pp. 185–196. Cambridge: Cambridge University Press.

    Google Scholar 

  • Cremer, H. and Gahvari, F. (1993). “Tax Evasion and Optimal Commodity Taxation.” Journal of Public Economics 50: 261–275.

    Article  Google Scholar 

  • Cremer, H. and Gahvari, F. (1996). “Tax Evasion and the Optimum General Income Tax.” Journal of Public Economics 60: 235–249.

    Article  Google Scholar 

  • Dubin, J. A. et al. (1992). “The Demand for Tax Return Preparation Services.” Review of Economics and Statistics 74: 75–82.

    Google Scholar 

  • Epstein, L. G. (1992).“Behaviour under Risk: Recent Developments in Theory and Applications.” In Advances in Economic Theory: Sixth World Congress of The Econometric Society, Laffont, J. J., ed., Vol. II, pp. 1–63. Cambridge: Cambridge University Press.

    Google Scholar 

  • Epstein, L. G. and Zin, S. E. (1990). “‘First-Order’ Risk Aversion and the Equity Premium Puzzle.” Journal of Monetary Economics 26: 387–407.

    Article  Google Scholar 

  • Erard, B. (1993). “Taxation with Representation: an Analysis of the Role of Tax Practitioners in Tax Compliance.” Journal of Public Economics 52: 163–197.

    Article  Google Scholar 

  • Erard, B. and Feinstein, J. (1994a). “Honesty and Evasion in the Tax Compliance Game.” Rand Journal of Economics 25: 1–19.

    Google Scholar 

  • Erard, B. and Feinstein, J. (1994b). “The Role of Moral Sentiments and Audit Perceptions in Tax Compliance.” Public Finance 49 (Suppl.): 70–89.

    Google Scholar 

  • Erard, B. (1997). “Self-Selection with Measurement Errors: a Microeconometric Analysis of the Decision to Seek Tax Assistance and its Implications for Tax Compliance.” Journal of Econometrics 81:319–356.

    Article  MATH  Google Scholar 

  • Feinstein, J. S. (1991). “An Econometric Analysis of Income Tax Evasion and Its Detection.” Rand Journal of Economics 22: 14–35.

    Google Scholar 

  • Fiorentini, G. and Peltzman, S., (1995). “The Economics of Organised Crime: Introduction.” In The Economics of Organised Crime, Fiorentini, G. and Peltzman, S., eds., pp. 1–30. Cambridge: Cambridge University Press.

    Google Scholar 

  • Fortin, B., Marceau, N., and Savard, L. (1997). “Taxation, Wage Controls and the Informal Sector.” Journal of Public Economics 66: 293–312.

    Article  Google Scholar 

  • Franzoni, L. A. (2000). “Tax Evasion.” In Encyclopedia of Law and Economics, Bouckaert, B. and De Geest, G., eds. Cheltenham, U.K.: Elgar.

    Google Scholar 

  • Frey, B. (1997). Not just for the Money: an Economic Theory of Personal Motivation, Cheltenham, U. K. and Lyme, N. H., eds. Elgar distributed by American International Distribution Corporation Williston.

    Google Scholar 

  • Garoupa, N. (1997). “The Theory of Optimal Law Enforcement.” Journal of Economic Surveys 11:267–295.

    Article  Google Scholar 

  • Gauthier, B. and Gersovitz, M. (1993). “Revenue Erosion through Exemption and Evasion in Cameroon.” Journal of Public Economics 64: 407–424.

    Google Scholar 

  • Graetz, M. J., Reinganum, J. F., and Wilde, L. L. (1986). The Tax Compliance Game: toward an Interactive Theory of Law Enforcement.” Journal of Law, Economics and Organization 2:1–32.

    Google Scholar 

  • Greenberg, J. (1984). “Avoiding Tax Avoidance: a (Repeated) Game-theoretic Approach.” Journal of Economic Theory 32: 1–13.

    Article  MATH  Google Scholar 

  • Harrington, W. (1988). “Enforcement Leverage when Penalties are Restricted.” Journal of Public Economics 37: 29–53.

    Article  Google Scholar 

  • Hettich, W. and Winer, S. L. (1997). “The Political Economy of Taxation.” In Perspectives on Public Choice: A Handbook, Mueller, D. C., ed., pp. 481–525. Cambridge: Cambridge University Press.

    Google Scholar 

  • Hindriks, J. (1999). “On the Incompatibility between Revenue Maximsation and Tax Progressivity.” European Journal of Political Economy 15: 123–140.

    Article  Google Scholar 

  • Hindriks, J., Keen, M., and Muthoo, A. (1999). “Corruption, Extortion and Evasion.” Journal of Public Economics 74: 395–430.

    Google Scholar 

  • Hunter, W. J. and Nelson, M. (1995). “Tax Enforcement: a Public Choice Perspective.” Public Choice 82: 53–67.

    Article  Google Scholar 

  • Johnson, S., Kaufmann, D., and Zoido-Lobatòn, P. (1999). “Corruption, Public Finances and the Unofficial Economy.” Policy Research World Bank WP n. 2169.

    Google Scholar 

  • Kaplow, L. (1992). “The Optimal Probability and Magnitude of Fines for Acts that Definitely are Undesirable.” International Review of Law and Economics 12: 3–11.

    Article  Google Scholar 

  • Klepper, S., Mazur, M., and Nagin, D. (1991). “Expert Intermediaries and Legal Compliance: the Case of Tax Preparers.” Journal of Law and Economics 34: 205–229.

    Article  Google Scholar 

  • Kim, Y. (2003). “Income Distribution and Equilibrium Multiplicity in a Stigma-Based Model of Tax Evasion.” Journal of Public Economics 87: 1591–1616.

    Article  Google Scholar 

  • Kolm, S. (1973). “A Note on Optimum Tax Evasion.” Journal of Public Economics 2: 265–270.

    Article  Google Scholar 

  • Lacroix, G. and Fortin, B. (1992). “Utility-based Estimation of Labour Supply Functions in the Regular and Irregular Sectors.” Economic Journal 102: 1407–1422.

    Google Scholar 

  • Landsberger, M., Monderer, D., and Talmor, I. (2000).“Feasible Net Income Distributions Under Income Tax Evasion: An Equilibrium Analysis.” Journal of Public Economic Theory 2: 135–153.

    Article  Google Scholar 

  • Lee, K. (1998). “TaxEvasion, Monopoly, and Nonneutral Profit Taxes.” National Tax Journal 5: 333–338.

    Google Scholar 

  • Malik, A., (1990). “Avoidance, Screening and Optimum Enforcement.” Rand Journal of Economics 21: 341–353.

    Google Scholar 

  • Malik, A. and Schwab, R. (1991). “The Economics of Tax Amnesties.” Journal of Public Economics 46: 29–49.

    Article  Google Scholar 

  • Marrelli, M. (1984). “On Indirect Tax Evasion.” Journal of Public Economics 25: 181–196.

    Article  Google Scholar 

  • McLaren, J. (1998). “Black Markets and Optimal Evadable Taxation.” Economic Journal 108: 665–679.

    Article  Google Scholar 

  • Mookherjee, D. and Png, I. P. L. (1989). “Optimal Auditing, Insurance, and Redistribution.” Quarterly Journal of Economics 104: 399–415.

    Google Scholar 

  • Mookherjee, D. and Png, I. P. L. (1992). “Monitoring vis-a-vis Investigation in Enforcement of Law.” American Economic Review 82: 556–565.

    Google Scholar 

  • Mookherjee, D. and Png, I. P. L. (1994). “Marginal Deterrence in Enforcement of Law.” Journal of Political Economy 102: 1039–1066.

    Article  Google Scholar 

  • Paul, C. and White, L. (1994). “Illegal Markets and the Social Costs of Rent-Seeking.” Public Choice 79:105–115.

    Article  Google Scholar 

  • Pestieau, P. and Possen, U. (1991). “Tax Evasion and Occupational Choice.” Journal of Public Economics 45: 107–125.

    Article  Google Scholar 

  • Pestieau, P., Possen, U. M., and Slutsky, S. M. (1994). “Optimal Differential Taxes and Penalties.” Public Finance 49 (Suppl.): 15–27.

    Google Scholar 

  • Pestieau, P., Possen, U. M., and Slutsky, S. M. (1998). “The Value of Explicit Randomization in the Tax Code.” Journal of Public Economics 67: 87–103.

    Article  Google Scholar 

  • Pommerehne, W. W., Hart, A., and Frey, B. (1994). “Tax Morale, Tax Evasion and the Choice of Policy Instruments in Different Political Systems.” Public Finance 49 (Suppl.): 52–69.

    Google Scholar 

  • Pyle, D. J. (1991). “The Economics of Taxpayer Compliance.” Journal of Economic Surveys 5: 163–198.

    Google Scholar 

  • Reinganum, J. F. and Wilde, L. L. (1985). “Income Tax Compliance in a Principal-Agent Frame-work.” Journal of Public Economics 26: 1–18.

    Article  Google Scholar 

  • Reinganum, J. F. and Wilde, L. L. (1986). “Equilibrium Verification and Reporting Policies in a Model of Tax Compliance.” International Economic Review 27: 739–760.

    Google Scholar 

  • Reinganum, J. F. and Wilde, L. L. (1991). “Equilibrium Enforcement and Compliance in the Presence of Tax Practitioners.” Journal of Law, Economics and Organization 7: 163–181.

    Google Scholar 

  • Sandmo, A. (1981). “Income Tax evasion, Labour supply, and the Equity-Efficiency Tradeoff.” Journal of Public Economics 16: 265–288.

    Article  Google Scholar 

  • Scotchmer, S. (1987). “Audit Classes and Tax Enforcement Policy.” American Economic Review 77: 229–233.

    Google Scholar 

  • Slemrod, J. (1994). “Fixing the Leak in Okun’s Bucket: Optimal Tax Progressivity when Avoidance Can Be Controlled.” Journal of Public Economics 55: 41–51.

    Article  Google Scholar 

  • Slemrod, J. and Yitzhaki, (2000). “Tax Avoidance, Evasion and Administration.” NBER Working Paper N. 7473.

    Google Scholar 

  • Stigler, G. J. (1970). “The Optimum Enforcement of Laws.” Journal of Political Economy 78: 526–536.

    Google Scholar 

  • Townsend, R. (1979). “Optimal Contracts and Competitive Markets with Costly State Verification.” Journal of Economic Theory 21: 265–293.

    Article  MATH  Google Scholar 

  • Virmani, A. (1989). “Indirect Tax Evasion and Production Efficiency.” Journal of Public Economics 39: 223–237.

    Article  Google Scholar 

  • Yaniv, G. (2003). “Auditing Ghosts by Prosperity Signals.” Economic Bulletin 8: 1–10.

    Google Scholar 

  • Yitzhaki, S. (1987). “On the Excess Burden of Tax Evasion.” Public Finance Quarterly 15: 123–137.

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. University of Eastern Piedmont, Italy

    Carla Marchese

Authors
  1. Carla Marchese
    View author publications

    You can also search for this author in PubMed Google Scholar

Editor information

Editors and Affiliations

  1. University of Erfurt, Erfurt, Germany

    Jürgen G. Backhaus

  2. George Mason University, Fairfax, Virginia, USA

    Richard E. Wagner

Rights and permissions

Reprints and permissions

Copyright information

© 2005 Springer Science + Business Media, Inc.

About this chapter

Cite this chapter

Marchese, C. (2005). Taxation, Black Markets, and Other Unintended Consequences. In: Backhaus, J.G., Wagner, R.E. (eds) Handbook of Public Finance. Springer, Boston, MA. https://doi.org/10.1007/1-4020-7864-1_10

Download citation

Publish with us

Policies and ethics

Search

Navigation