On inequality tax evasion and progressive taxes

This paper proposes a simple variation of the Allingham and Sandmo (1972) construct and integrates it to a dynamic general equilibrium framework with heterogeneous agents. We study an overlapping generations framework i n which agents must initially decide whether to evade taxes or not. In the event they decide to evade, they then have to decide the extent of income or wealth they wish to under-report. We find that in comparison with the basic approach, the ‘evade or not’ choice drastically reduced the extent of evasion in the economy. This outcome is the result of an anomaly intrinsic to the basic Allingham and Sandmo version of the model, which makes the evade-or-not extension a more suitable approach to modelling the issue. We also find that the basic model, and the model with and ‘evade-or-not’ choice have strikingly different political economy implications, , which suggest fruitful avenues of empirical research.