Agent-based Modeling of Tax Evasion

Chapter 6TAXSIM: A Generative Model to Study the Emerging Levels of Tax Compliance in a Single Market Sector

László Gulyás, Tamás Máhr and István J. Tóth

6.1 Introduction

Taxation is a crucial means to operate the complex machinery of society. Its web of complex patterns of interaction and transfers are not only based on law, but trust, social pressure, enforcement, and economic motivations contribute to its emerging delicate balance alike.

This chapter describes TAXSIM¹, a generative approach to study tax evasion. TAXSIM is an agent-based model, concerned with the operations of a single market sector. The economic well-being of agents depends on the employment contracts they make among each other and on their tax content. In this model tax evasion is a technique to reduce costs (and to raise wages); therefore, tax evasion is a matter of degree rather than a simple binary or ternary choice (e.g., complier/evader, or complier/evader/sceptic) (see Chapter 11). TAXSIM was inspired by the Hungarian tax system, where the burden of the employee's personal income tax is split between employers and employees. Other taxes, such as corporate income tax and value-added tax are not considered.

In TAXSIM, agents have no perfect information; they estimate the various system-level parameters (such as the frequency and accuracy of audits). These estimations are based on the agents' individual experiences, as well as on experiences of others. Because of the latter, the social network of agents ...