This article develops a differential game of tax avoidance by modeling the interactions between a taxpayer and the tax authority. The solution to the game is a noncooperative Nash that depends on the resources used by the tax authority to enforce legislation and the cost borne by the taxpayer in tax compliance. Empirical evidence is provided for the value added tax (VAT) using a cross-section of Organisation for Economic Co-operation and Development (OECD) and non-OECD countries. VAT efficiency, defined as the ratio of collections as a share of consumption to the statutory rate, rises the lower the VAT rate, the lower the share of administrative costs in tax revenue (proxying for the efficiency of tax administration), the more pro-competition the regulatory framework in product markets (measuring non-tax incentives for noncompliance) and the better the country's governance indicators (regulatory quality, rule of law, and government effectiveness).
