Deakin University

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Can we tax the desire for tax evasion?

posted on 2008-01-01, 00:00 authored by R Dzhumashev, Emin Gahramanov
A static income tax evasion model à la Yitzhaki (1974) predicts that an increase in the tax rate causes taxpayers to increase their income declaration. In an important contribution, Lin and Yang (2001) obtained exactly the opposite result by extending the Yitzhaki (1974) model to a dynamic one with Ak(t) production technology. In this paper we show that once the Lin and Yang (2001) model becomes fully compatible with the Yitzhaki’s (1974) setting, the negative relationship between taxes and evasion still prevails. We then enrich the dynamic model with a productive public sector, and obtain an ambiguous relationship between taxes and evasion incentives as in Allingham and Sandmo (1972). We also prove that the growth-maximizing share of public expenditures in total output satisfies the natural efficiency condition even in the presence of tax evasion. However, the latter result is not robust to the introduction of the costs associated with income declaration and concealment activities.



School Working paper - Economics Series ; SWP 2008/19


1 - 19


Deakin University, School of Accounting, Economics and Finance

Place of publication

Geelong, Vic.



Publication classification

CN.1 Other journal article

Copyright notice

2008, The Authors

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