An evasive topic: theorizing about the hidden economy
Journal article, Peer reviewed
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Original versionInternational Tax and Public Finance 2012, 19(1):5-24 10.1007/s10797-011-9185-9
This paper reviews some central issues that arise in theorizing about tax evasion decisions and the hidden economy. It starts from the Allingham-Sandmo (1972) modelling of the tax evasion decision as a choice under uncertainty based on expected utility maximization and risk aversion. It goes on to discuss alternative specifications of the taxpayer’s preferences with particular regard to the explanation of the extensive margin, i.e. the decision on whether or not to engage in tax evasion. It extends the model to the case of variable labour supply with work in both official and black labour markets. It then considers the application of the theory to taxes on wealth and income from capital, indirect tax evasion and smuggling. It also includes a consideration of general equilibrium effects and of the problems that evasion causes for the theory of optimal income and commodity taxes. It concludes with a brief discussion of the implications of tax evasion for economic policy in the welfare state.
This is a pre-copyedited, author-produced PDF of an article accepted for publication in International Tax and Public Finance, following peer review. The final publication International Tax and Public Finance 2012, 19(1):5-24 is available at Springer via DOI: 10.1007/s10797-011-9185-9 .