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Population dynamics of tax avoidance with crowding effects

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  • Johannes Lorenz

    (University of Passau)

Abstract

There are two ways for taxpayers to avoid paying taxes: legal tax optimization and illegal tax evasion. The government reacts by altering the law, and by conducting audits, respectively. These phenomena are modeled as a strategic interaction between all taxpayers: the more taxpayers optimize, the lower the optimization result as a consequence of the government tightening the tax law. The more taxpayers evade, the higher the risk of detection because of the tax agencies increasing the audit probability. It emerges that, in equilibrium, the population shares of optimizers and evaders are not interdependent; rather, they both increase to the detriment of the share of non-optimizing taxpayers. If the government reacts to changed optimization behavior with too large a delay, an equilibrium tax law cannot be reached. Tax codes should be updated rapidly in order to avoid a permanent change of the tax law, which is costly both for the legislator and the taxpayers facing legal uncertainty.

Suggested Citation

  • Johannes Lorenz, 2019. "Population dynamics of tax avoidance with crowding effects," Journal of Evolutionary Economics, Springer, vol. 29(2), pages 581-609, April.
  • Handle: RePEc:spr:joevec:v:29:y:2019:i:2:d:10.1007_s00191-018-0572-6
    DOI: 10.1007/s00191-018-0572-6
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    References listed on IDEAS

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    Cited by:

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    2. Lorenz, Johannes & Diller, Markus & Sureth, Caren, 2021. "The epidemiology of tax avoidance narratives," arqus Discussion Papers in Quantitative Tax Research 268, arqus - Arbeitskreis Quantitative Steuerlehre.

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    More about this item

    Keywords

    Tax evasion; Tax avoidance; Evolutionary game theory; Crowding;
    All these keywords.

    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • K34 - Law and Economics - - Other Substantive Areas of Law - - - Tax Law

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