A Multi-Agent Model of Tax Evasion with Public Expenditure

29 Pages Posted: 19 Oct 2011

See all articles by Paolo Pellizzari

Paolo Pellizzari

Ca Foscari University of Venice - Dipartimento di Economia

Dino Rizzi

Ca Foscari University of Venice - Dipartimento di Economia

Date Written: October 1, 2011

Abstract

We develop a model where heterogeneous agents maximize their individual utility based on (after tax) income and on the level of public expenditure (as in Cowell, Gordon, 1988). Agents are different in risk aversion and in the relative preference for public expenditure with respect to personal income. In each period, an agent can optimally conceal some income based on conjectures on the perceived probability of being subject to audits, the perceived level of public expenditure and the perceived amount of tax paid by other individuals.

As far as the agent-based model is concerned, we assume that the Government sets the tax rate and the penalties, uses all the revenue to finance public expenditure (with no inefficiency) and fights evasion by controlling a (random) fraction of agents.

We show that, through computational experiments based on micro-simulations, stable configurations of tax rates and public expenditure endogenously form in this case as well. In such equilibrium-like situations we find: a positive relationship between the tax rate and evasion still arises; tax compliance mainly depends on the distribution of personal features like risk-aversion and the degree of preference for public expenditure; an endogenous level of tax evasion that is almost not affected by reasonable rates of control. A proper choice of the tax rate results instead in voluntary partial compliance; the enforcement of higher compliance rates requires unrealistic and costly large-scale audits.

Keywords: Tax evasion, public expenditure, agent-based models

JEL Classification: H26, H40, C63

Suggested Citation

Pellizzari, Paolo and Rizzi, Dino, A Multi-Agent Model of Tax Evasion with Public Expenditure (October 1, 2011). University Ca' Foscari of Venice, Dept. of Economics Research Paper Series No. 15/WP/2011, Available at SSRN: https://ssrn.com/abstract=1946260

Paolo Pellizzari (Contact Author)

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

Dino Rizzi

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

HOME PAGE: http://www.unive.it/persone/rizzid

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
104
Abstract Views
691
rank
287,239
PlumX Metrics