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Tax evasion, audits with memory, and portfolio choice

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  • Ma, Yong
  • Jiang, Hao
  • Xiao, Weilin

Abstract

In this study, we consider the memory property of tax audits to investigate the tax evasion problem from the perspective of portfolio choice. We explore the implications of the memory property for tax evasion, consumption, and asset allocation. Assuming that tax audits and jumps in the risky asset both follow self-exciting Hawkes processes, we provide a semi-analytical solution to this problem for an agent with constant relative risk aversion (CRRA) utility. We find that the memory feature does not change the agent’s effective holding in the risky asset, and its effects on tax evasion and consumption are determined by the agent’s risk aversion. It is suggested that government should treat agents differentially by their risk preferences and set audit-related parameters carefully to avoid unnecessary public expenditure.

Suggested Citation

  • Ma, Yong & Jiang, Hao & Xiao, Weilin, 2021. "Tax evasion, audits with memory, and portfolio choice," International Review of Economics & Finance, Elsevier, vol. 71(C), pages 896-909.
    • Handle: RePEc:eee:reveco:v:71:y:2021:i:c:p:896-909
    DOI: 10.1016/j.iref.2020.10.010
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    Cited by:

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    3. Damiani, Genaro Martín, 2024. "Indirect tax evasion, shadow economy, and the Laffer curve: A theoretical approach," MPRA Paper 121779, University Library of Munich, Germany.

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    More about this item

    Keywords

    Tax evasion; Tax audits with memory; Dynamic consumption-investment; Hawkes process;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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