Abstract
The economic analysis of crime began in 1968 with Becker’s classic article “Crime and Punishment: An Economic Approach.” While Becker mentioned tax evasion as an area of application for his general model, Allingham and Sandmo and Srinivasan provided the analysis. Generally, this approach treats noncompliance as a rational individual decision based upon probabilities of detection and conviction and levels of punishment. In Allingham and Sandmo’s model, the taxpayer’s actual income is exogenously given and known by the taxpayer but not the IRS.
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Notes
- 1.
For a general model which incorporates labor supply decisions, see Sandmo (1981). See also Witte and Woodbury (1983) or Cowell (1985).
- 2.
Our treatment is therefore a “limited information” approach but is nonetheless appropriate because it produces a consistent and unbiased estimate of the effect of IRS audits and enforcement on taxpayer compliance.
- 3.
See also the compendium Why People Pay Taxes: Tax Compliance and Enforcement, Joel Slemrod, ed. The University of Michigan Press: Michigan: Ann Arbor, 1992.
- 4.
The similarity to DGW is due to using proxy evasion measures for the economy rather than direct evasion measures. Another similarity is using a time-series data source as opposed to a purely cross-sectional data source, such as the 1969 TCMP. However, DGW (1990) combined both cross-sectional and time-series information in their empirical analysis.
- 5.
Plumley modified some of the DGW reporting and compliance equations using: (i) income and offsets rather than tax collected; and (ii) tax return filings relative to expected filings rather than to population. Plumley introduced refinements to the DGW audit rate measure (based on start rates versus closure rates) and considered new factors for taxpayer burden and CI enforcement activity.
- 6.
In addition to this spillover effect of audit rate, they also found that there is a positive relationship between education and tax compliance.
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© 2012 Springer Science+Business Media, LLC
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Dubin, J.A. (2012). Economic Theory and the Literature. In: The Causes and Consequences of Income Tax Noncompliance. Springer, New York, NY. https://doi.org/10.1007/978-1-4419-0907-7_4
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DOI: https://doi.org/10.1007/978-1-4419-0907-7_4
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