Tax evasion and tax behaviour efficiency: a system dynamics approach

Abstract

Purpose and subject of researchTwo modifications of a system dynamics model are developed in order to study different types of a taxpayer’s behaviour – notably, opportunistic tax evasion and soft adaptive ones.Research methodologyA generic model by M. Allingham and A. Sandmo, based on “homo economicus” conception, implying that an agent is guided in his behaviour by maximization of expected utility, shows that taxpayer’s choice to evade taxes depends on tax rates and tax inspection parameters, among which the most important are the probability of inspection and penalty degree (penalty rates).Value results       Computations have confirmed that with relatively low penalties and middle level of inspection opportunistic behaviour is more effective for taxpayers. When opportunistic motivation is mass-spread, this type of behaviour becomes predominant, which leads to substantial losses of the state. Such a state of tax environment is characterised by the conflict of interests of the parties: tax evasion is profitable for the agents and un-remunerative for the state.ConclusionsThe results of multiple experiments are discussed and comparative advantages and effectiveness of tax behaviour are analyzed regarding  joint (declared + shadow) taxpayer’s income and real/net state revenue.Key words: entropy approach, income distribution, system dynamics model, inspection opportunistic behaviour.