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Tax Evasion: A Two-Period Model

Author

Listed:
  • TINGTING XIAO

    (School of Business and Management, Hong Kong University of Science and Technology, Kowloon, Hong Kong)

  • KE LIU

    (MADIS and National Center for Mathematics and Interdisciplinary Sciences, Academy of Mathematics and Systems Science, CAS, Beijing, P. R. China)

  • KIN KEUNG LAI

    (Department of Management Sciences, City University of Hong Kong, Kowloon, Hong Kong;
    School of Business Administration, North China Electric Power University, Beijing, P. R. China)

Abstract

We mainly study a taxpayer's optimal strategies of tax evasion and its relevant properties, in order to deduce some effective suggestions and theoretical bases for the tax authority to restrain tax evasion. Based on the Christiansen static model of tax evasion, we formulate a two-period model where the discovery of tax evasion in the second period induces a tax audit in the first period if it has not been done before. The taxpayer has to choose the amount of tax evasion in each period to maximize the total expected utility of the two periods. We show that the threat of having the first-period evasion discovered in the second period diminishes attractiveness of tax evasion in both periods. We also discuss the policy of audit power enhancement, where the audit probability in the second period will be increased if tax evasion is discovered in the first period. We find that this policy may play two roles. First, it can reduce the incentive of tax evasion in the second period if tax evasion is discovered in the first period. Second, a high potential increase of the audit probability may contain tax evasion in the first period but may cause more evasion in the second period.

Suggested Citation

  • Tingting Xiao & Ke Liu & Kin Keung Lai, 2014. "Tax Evasion: A Two-Period Model," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 31(03), pages 1-21.
    • Handle: RePEc:wsi:apjorx:v:31:y:2014:i:03:n:s0217595914500171
    DOI: 10.1142/S0217595914500171
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    References listed on IDEAS

    as
    1. Feige, Edgar L. & Cebula, Richard, 2011. "America’s Underground Economy: Measuring the Size, Growth and Determinants of Income Tax Evasion in the U.S," MPRA Paper 29672, University Library of Munich, Germany.
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