Agent-based Modeling of Tax Evasion

Chapter 1Agent-Based Modeling and Tax Evasion: Theory and Application

Sascha Hokamp, László Gulyás, Matthew Koehler and Sanith Wijesinghe

1.1 Introduction

While the formal study of tax evasion began with a seminal paper by M.G. Allingham and A. Sandmo titled “Income Tax Evasion: A Theoretical Analysis” in 1972, scholars and practitioners continue to be challenged with designing and implementing policies and incentives to mitigate tax evasion. While early theoretical studies provide a baseline from which to evaluate hypotheses, the methodology underlying the classical formulation; that is, the use of utility functions and the assumptions of taxpayer homogeneity and rationality, fall short in characterizing taxpayer behaviors observed in practice. In this book, we seek to advance the state of the art in the study of tax evasion by presenting an alternative computational approach based on simulating individual agents. These so-called agent-based models (ABM) aim to take into account individual preferences and can accommodate a larger variety of intrinsic and extrinsic variables to help explore a broader space of compliance outcomes. In this introductory chapter, we present a formal definition of tax evasion in Section 1.2 and outline the case for why its analysis is a priority not only for tax administrators, but also for society at large. The classical theoretical models of tax evasion are then summarized in Section 1.3 to provide historical context as well as an understanding ...