Agent-based Modeling of Tax Evasion

Chapter 3Taxpayer's Behavior: From the Laboratory to Agent-Based Simulations

Luigi Mittone and Viola L. Saredi

3.1 Tax Compliance: Theory and Evidence

As pointed out by Andreoni et al. (1998), the problem of tax evasion and noncompliance has been introduced in the economic literature just as an additional “risky asset” to the household's portfolio. The first theoretical representations of individual taxpayer's compliance date back to the 1970s: the most influential, and probably the most criticized, rational choice models have been developed by Allingham and Sandmo (1972) and Srinivasan (1973). As outlined in Chapter 1, these models portray the taxpayer's decision problem as an investment choice involving a sure and a risky lottery, and adopt the formalization of expected utility theory (von Neumann and Morgenstern, 1944). Taxpayers are supposed to choose the extent of income declaration that maximizes their expected utility, defined according to income level, individual risk propensity, audit probability, and monetary punishment, in case of evasion (or noncompliance) detection. These studies focus the effect of such parameters on evasion: for instance, a higher audit probability and/or a punishment proportional to the evaded tax reduces the expected value of evasion, and thus its attractiveness (Yitzhaki, 1974).

However, some issues on the aforementioned models have been raised, and their validity has been questioned, as the portfolio approach fails to address real-world complexity. ...