An evasive topic: theorizing about the hidden economy |
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Authors: | Agnar Sandmo |
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Institution: | 1. Department of Economics, Norwegian School of Economics, 5045, Bergen, Norway
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Abstract: | This paper reviews some central issues that arise in theorizing about tax evasion decisions and the hidden economy. It starts
from the Allingham and Sandmo (J. Public Econ. 1:323–338, 1972) modeling of the tax evasion decision as a choice under uncertainty based on expected utility maximization and risk aversion.
It goes on to discuss alternative specifications of the taxpayer’s preferences with particular regard to the explanation of
the extensive margin, i.e. the decision on whether or not to engage in tax evasion. It extends the model to the case of variable
labor supply with work in both official and black labor markets. It then considers the application of the theory to taxes
on wealth and income from capital, indirect tax evasion, and smuggling. It also includes a consideration of general equilibrium
effects and of the problems that evasion causes for the theory of optimal income and commodity taxes. It concludes with a
brief discussion of the implications of tax evasion for economic policy in the welfare state. |
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