Who Benefits from Tax Evasion?1 - GitHub Pages

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Economic AnAlysis & Policy, Vol. 43 no. 2, sEPtEmbEr 2013

Who Benefits from Tax Evasion?1

James Alm2 and Keith FinlayDepartment of Economics, Tulane University,

6823 St. Charles Avenue, 208 Tilton Hall, New Orleans, LA 70118

U.S.A. (Email: [email protected])

Abstract: Inthispaper,weexaminethedistributionaleffectsoftaxevasion,usingresultsfromtheoretical,experimental,empirical,andespeciallythegeneralequilibriumliteraturesontaxevasion.Much–ifnotall–ofthisevidenceconcludesthatthemainbeneficiariesofsuccessfultaxevasionarethetaxevadersthemselves,withdistributionaleffectsthatlargelyfavorhigherincomeindividuals.However,whengeneralequilibriumadjustmentsin commodity and factor prices are considered, the distributional effects becomeconsiderablymorecomplicated.Theworkontaxcomplianceisalsoputinthebroadercontextofthedistributionaleffectsofothertypesofcriminalactivities,wheresimilarforcesseemtobeatwork.Weconcludewithsomesuggestionsforfutureresearch.

I.InTroducTIon

Whobenefitsfromtaxevasion?Answeringthisquestionmayseemobvious:theevader(ifsuccessfulofcourse)wouldseemtokeeptheevadedincomeinitsentiretyandsowouldseemtobethebeneficiaryoftaxevasion.Indeed,thestandardAllinghamandSandmo(1972)approachtotheanalysisoftaxevasionisbasedonthisimplicitassumption,andmuchoftheanalysisoftaxevasion,whethertheoretical,experimental,orempirical,reliesuponit.However,thisassumptionislikelytobeincorrect,orleastincomplete.Theactoftaxevasionsetsinmotionarangeofadjustments,asindividualsandfirmsreacttothechangesinincentivescreatedbyevasion.Theseadjustmentsleadinturntofactorandcommoditypricechanges,whichgeneratesubsequentfactorandcommoditymovementsinafullgeneralequilibriumsetting.Allof theseadjustmentsaffect thefinalpricesof factorsandcommodities thatdeterminethetruedistributionaleffectsofevasion,andafullanalysisofthedistributionaleffectsmustrecognizeandincorporatethesegeneralequilibriumadjustments.

Inthispaperweexaminepreviouseffortstoanalyzethedistributionaleffectsoftaxation,focusingonstudiesthatfailtoconsiderthesevariousgeneralequilibriumadjustmentsand,especially, those that do.We argue that, once these general equilibrium adjustments are

1 Thispaperisbasedonakeynoteaddressattheconference“TheShadowEconomy,TaxEvasionandMoneyLaundering”heldinMünster,GermanyattheuniversityofMünsterinJuly2011.

2 correspondingauthor.

Who bEnEfits from tAx EVAsion?

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recognized,itisnolongerobviousthatthosewhobenefitfromtaxevasionaretheindividualsactuallyengaginginevasion;indeed,theseparticipantsmaynotbenefitatall.Becausesuccessfultaxevasiongeneratesimmediatewinners,comparabletoa“taxadvantage”(Martinez-Vazquez1996)generatedbythetaxlaws,replicationandcompetitionviathemobilityoffactorsandproductsshouldworktowardtheeliminationofthisadvantage.Thisgeneralequilibriumprocessofadjustmentshouldinturnaffecttherelativepricesoffactorsandcommoditiesasresourcesmoveintoandoutoftherelevantactivities,andthesechangesshouldtendtoeliminate,oratleasttoreduce,theinitialtaxadvantageoftaxevasion.

Thesetypesofgeneralequilibriumeffectsarenottypicallyconsideredinthestandardapproachtotaxevasion.Thisomissionconsiderablyweakenstheoverallrelevanceof thestandardapproach,atleastinitsconclusionsaboutthedistributionaleffectsoftaxevasion.considerasoneexampletaxevasionbydomestichelp,suchashousecleaners,babysitters,andyardcareworkers.Taxevasionheremayactuallybenefitthehigher-incomehouseholdshiringtheseservicesbecausethesehouseholdscanpaylowerpricesfortheservices.However,these(andother)typesofadjustmentsareoftenignored.

Evenso,itisnoteworthythatthesetypesofadjustmentshaveoftenbeenrecognizedinthemoregeneralcrimeliterature,ofwhichtaxevasionisadirectoffshoot.Forexample,thereisconsiderableempiricalworkthatdemonstratestheimpactofcrimeonthepriceofhousing.Similarly, theeffectsofcrimeonthepricesofconsumergoodsoronjobopportunitiesinhigh-crimeurbanareasarewell-recognized,asistheimpactofgreaterpoliceenforcementeffortsontheseneighborhoods.Thisresearchoncriminalactivitiesbroadlyhastodatehadlittleimpactonthenarrowerworkontaxevasion.

Inthispaperweanalyzethedistributionaleffectsofcrimegenerallyandoftaxevasionspecifically,focusingonthepriceeffectsofthegeneralequilibriumadjustmentsthataresetinmotionbytheseactivities.Inthefollowingsections,wediscusssignificantpreviousresearchontheincidenceofcrimeandoftaxevasion,highlightingespeciallysomeoftheerrorsthatresearchers – including us – can commitwhen they fail to consider general equilibriumadjustmentsandindicatingwhat“essentialelements”areneededinanappropriatemodel.Wethenpresentsomeofourownworkthatdemonstrateshowsomeofthese“essentialelements”canbeintroducedandwhatthesedifferentapproachescanilluminate.Wefinishwithsomesuggestionsforwaystoextendevenfurtherthesegeneralequilibriummodels.

II.SoMErELATEdWork

2.1 The Basic Portfolio Model of Tax Evasion

Intheiroriginalwork,AllinghamandSandmo(1972)appliedtheBecker(1968)economics-of-crimemodeldirectlytotaxevasion.3Theirbasicmodelisessentiallya“portfolio”approachtoincometaxevasion,inwhicharationalindividualcomparestheexpectedutilityofbeingdetectedandpayingapenaltyontaxevasiontotheexpectedutilityfrombeingabletokeeptheevadedincome.Theincidenceoftaxevasioninthisformulationissimple:thesuccessful

3 Seecowell(1990),Andreoni,Erard,andFeinstein(1998),SlemrodandYitzhaki(2002),andTorgler(2007)forcomprehensivesurveysoftheevasionliterature.SeeespeciallyAlm(2012)andSandmo(2012)forrecentdiscussionsandassessments.

JAmEs Alm And KEith finlAy

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evaderbenefitsexclusivelybykeepingtheevadedincomeinitsentirety.However,thisapproachignoresmarketforcesthatworktowardtheeliminationofthetaxadvantagecreatedbyevasionopportunities,asproductsandresourcesflowintoandoutofaffectedactivitiesandtherebychangebothcommodityandfactorprices.ourcentralthemeisthattheseforcescanonlybeanalyzedinageneralequilibriumframework.

However,thisportfoliomodelanditsmanyextensionsassumethattheunderlying“prices”(orincomeinthesimplestformofthemodel)arefixedandexogenous.Thismodelalsodoesnotconsiderthebroadereconomiccontextinwhichtheindividualmakestheevasiondecisions,includingthewaysinwhichtheindividualmayspendhisorher(evaded)income.Ageneralequilibriumframeworkisneededtoconsidertheseessentialelements.

2.2 Some Extensions

Severalstudieshaveinfactexaminedtaxevasion(andcloselyrelatedissuesliketheso-called“undergroundeconomy”)withsuchageneralequilibriumapproach,buildinguponthemodeloriginallypioneeredbyHarberger(1962).Inperhapsthemostcompleteanalysisofgeneralequilibriumeffectsofincometaxevasion,kesselman(1989)developsamulti-consumer,multi-sectorgeneralequilibriummodel,whichallowshimtomakequalitativeandquantitativeassessmentsoftheeffectsoftaxratechangesonevasionactivity,relativeoutputprices,andrealtaxrevenues.despitethemanyinsightsfromthiswork,includingtheanalysisofthedistributionaleffectsoftaxesviatheintroductionofindividualheterogeneitywithmultipleconsumers,kesselman(1989)doesnotallowforuncertaintyinindividualevasiondecisions.

Someotherworkallowsforsuchuncertainty.Forexample,Watson(1985)analyzesamodelwithtwolabormarketsthatofferdifferingevasionpossibilities,inordertoexaminetheeffectsofchangesintax,penalty,andauditratesontheallocationoflaboracrosslabormarkets.However,Watson(1985)modelsonlylabor(andnotcapital)markets,whichmeansthathecannotexaminethefullrangeofgeneralequilibriumpriceandincidenceeffectsthatevasionmaycreate.Indeed,Watson(1985,243)himselfwritesthat“…wehavenotdiscussedthepotentialinequitiesproducedbyevasion”.

LikeWatson(1985),Thalmann(1992)introducesuncertaintyintotheindividualevasiondecision. Inhisgeneralequilibriumframework, taxesareevadedwhenresourcesrelocatefromthe“reported”sectortothe“unreported”sector.ofsomerelevancetosomeofourlaterdiscussion,Thalmann(1992)usesanovelapproachthatrelegatestheuncertaintyofreturnsassociatedwithtaxevasiontothebudgetconstraintratherthanfollowingtheusualexpectedutilityapproach.However,Thalmann(1992)assumesasingle“representative”agent,andsoheisnotabletoexaminethedistributionaleffectsofevasion.4

2.3. Instructive Work from the Crime Literature

Toillustrateintheorytheeffectsofcrimeinageneralequilibriumsetting,considerasimplemetropolitanspatialeconomywithtwocities,populatedwithresidentsofsimilarpreferences

4 SeealsoJung,Snow,andTrandel(1993)anddavidson,Martin,andWilson(2007).


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butdivided into two incomegroups that segregate throughTiebout (1956)mobility.5 Inthissetting,crimecanbeseenassimilartomanyotherurbanamenities.nowsupposethatthereisanexogenous,across-the-boardincreaseincrime.TheTieboutsegregationwillbeassociatedwithadifferentialwillingness-to-pay(WTP)toreducetheincreaseincrime.Forexample,supposethatresidentsoftherichcityhaveagreaterWTPtoreducecrime.Asaresult,therichcitywillinvestrelativelymoreinadditionalpolice(paidforbyapropertytax)tocombatthecrimerise,andsotherewillbearelativelygreaterreductionincrimeintherichcity.

HeterogeneityinWTPwillthencreateacrimedifferential,thesizeofwhichwillbeaffectedbythemarginalproductivityofpoliceandthemagnitudeofcrimechasingandcrimecapturingexternalities.Thedifferentialwillcausesomeresidentsofthepoorcitytomovetotherichcity.Thismigrationwillincreasedemandforhousingintherichcity,causingrentstoriseintherichcityandtofallinthepoorcity.Therentdifferentialwillfurthercausesomehousingcapital tomovefromthepoortotherichcityuntilhousingrentsarebackinequilibrium.Thisgeneralequilibriumresponsewillincreaserentsinthepoorcity,andwillexacerbatetheutilityreductionassociatedwiththerelativecrimeincreaseinthepoorcity.Finally,althoughpropertytaxeswillhaveriseninbothcitiestopayfortheincreaseinpolice,theincreasewillbegreaterintherichcitygivenitsresidents’higherWTPforreducedcrime.

Thesegeneralequilibriumresponseshaveimportantdistributionalimplications.Givenauniformincreaseincrime,richerresidentswillbebetterabletorespondgiventheirhigherWTP.However,byspendingmoreonpolice,theywillnonethelessbearacost.Thus,ascrime-avoidingactivitiesvaryacrossincomegroups,lesscrimeagainstonegroupmayreflectgreateravoidancebehavior,ratherthanalowerburdenofcrime.

Thegeneral equilibrationof rents in themetropolitanareawill further exacerbate theutilitydeclineinthepoorcity.Asinanysimilarmodel,ownersofimmobileassetswillbearthefullburdenofthecrimeincreaseifallotherfactorsaremobile,andsolandownersinthepoorcitywillloserelativelymorewealth.Insofaraspropertyownershipisevenlydistributedthroughoutthemetropolitanarea,thiswillfurtherburden(land-owning)residentsinthepoorcity.Iflocalresidentsdonotownthelandinthepoorcity,thenthedistributionalimpactislessclear(i.e.,itcouldshiftsomeoftheburdentotherich).Themoremobilearehousingcapitalandresidents,thelessutilitylosswillbeexperiencedbythemarginalrentersintheeconomy.6

Allofthesegeneralequilibriumresponsesclearlydependonthespecificmodelstructure.Evenso,thebroaderpointisthattheseadjustmentsaffectthedistributionofincomeinwaysthatthecrimeliteraturehasconsideredandanalyzedtheoreticallyusingageneralequilibriumframework.

Thecrime literaturehasalsoconsideredandanalyzedempirically thesedistributionaleffects.Indeed,alargeliteratureconsidersthelocaleffectofcrime(ortheperceptionofcrimerisk)onhousingprices.Theempiricalchallengehereistoidentifythecausaleffectofcrime

5 Forgeneralequilibriumtreatmentsofcrime,seeFurlong(1987),Imrohorogolu,Merlo,andrupert(2000,andBurdett,Lagos,andWright(2003).

6 Thereareotherfactorsthatmayaffectthedistributionaleffects,suchasinterjurisdictionalspilloversofpoliceinvestment,moregeneralexternalitiesofcrimethatmayaffectthemovementsofpeopleandcapitalinthemetropolitanarea(e.g.,thespatialmismatchofWilson(1987),andthe“brokenwindows”theoryofWilsonandkelling(1982)).


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onpriceswithouttheconfoundingeffectsofotherneighborhoodcharacteristicsthatcorrelatewithcrime.recentstrategiesusepaneldataoncrimeandprices(IhlanfeldtandMayock2010)orplausiblyexogenousvariationincrimeriskperceptiongeneratedbysexoffenderregistries(Lindenandrockoff2008).Thisworkfindsverylocalizedandshort-runpriceeffects,anditisnotclearhowmuchgeneralequilibriumcontentiscontainedinthereduced-formandparticularlytheshort-runpricemeasures.

Alesscommonempiricalapproachtotheeconomicburdenofcrimeisthe“contingent-valuation”approach.Forexample,cohenetal.(2004)conductasurveytomeasurewillingness-to-paytoreducecrime,andtheyfindestimatesofWTPthataremuchlargerthaninmoreconventionalapproachesthatmeasurethesocialcostsofcrime.InsofaraswebelieveagentscanestimatetheirWTP,theseestimatesshouldincludegeneralequilibriumadjustments.

Again,theessentialpointhereisthatthepotentialroleofgeneralequilibriumadjustmentshasbeenexaminedinmanypartsofthecrimeliterature.Aswediscussnext,acompleteanalysisofthesefactorsrequiressome“essentialelements”.

3.WHATISnEEdEd:“ESSEnTIALELEMEnTS”oFAModELoFTAxEVASIonIncIdEncE

These studies have added considerably to our understanding of the general equilibriumadjustmentsthatoccurinthepresenceoftaxevasionandofcrime.Evenso,thesestudiesdonotaddressfullythemainissuessurroundingdistributionaleffects.Thereisnosinglestudythathasexplicitlyincorporatedallofthe“essentialelements”thatwebelieveamodelmusthaveinordertocapturethesedistributionaleffects.

Focusingmainlyontaxevasion,whatarethesefeatures?First, andmost obviously, themodel should be able to capture the potential general

equilibriumeffectsoftaxevasion.Thesegeneralequilibriumeffectsinducechangesintherelativepricesbothof factorsofproductionandofgoodsandservices,broughtaboutbymarketequilibriumforces.Ifthereisataxadvantagethatwillbereflectedinexpectedfactorincomeorfirms’expectedprofits,thepotentialmobilityofresourceswillleadtothenecessarypriceadjustmentsuntilthisadvantageiseliminated.relatedly,thisgeneralequilibriummodelshouldallowfordifferencesinendowmentsand/orinpreferencesamongindividualssothatdifferentgroupsmaybenefitdifferentlyfromchangesinrelativeprices.Ageneralequilibriummodelwithasinglerepresentativeagentcannotofcourseadequatelyexaminethedistributionofeconomicgainsandlossesacrossincomegroups.

Second,themodelshouldincorporatetheelementofuncertaintyinanindividual’sorafirm’sdecisiontoevadeinatleastonesectoroftheeconomy.Thisuncertaintymayreflectsimplytheelementoftaxevasionasanopportunityfacingtheagent,asintheAllinghamandSandmo(1972)approach.Morebroadly,itmayreflectthepossibilitythatatsomepointtheagentmaybesubjecttotaxation.

Third,themodelshouldallowforvaryingdegreesofcompetitionorentryacrosssectorsintheeconomy,includingthoseinwhichtaxevasionisprevalent.Thisincludesmobilityoffactors,suchaslaborinthecaseofincometaxevasion;italsoincludesfirmentryinseveralsectors,asinthecaseofsalestaxorcorporateincometaxevasion.Theelementofmobilityis


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criticaltoanunderstandingofhowmuchofthetaxadvantagemayberetainedbytheinitialevadersandhowmuchisshiftedelsewhereviafactorandcommoditypricechanges.

Acompleteanalysisoftheincidenceoftaxevasionthereforerequirestheconsiderationof general equilibrium effects, in a setting inwhich agents can differ in preferences andendowments,inwhichuncertaintyispresent,andinwhichmobilityacrosssectorscanvary.Atoneextreme,withnoentryorcompetition, thoseparticipatinginevasionactivitiesarethefinalbeneficiaries,asthestandardapproachpredicts.Attheotherextreme,withperfectcompetitionandcompletelyfreeentry,taxevaders(evenifsuccessful)mayhardlybenefitatallbecauseanyinitialbenefitfromtheabsenceoftaxationiserodedviaentryandcompetition.Alloftheseconsiderations–plussomeadditionalonesdiscussedintheconclusions–argueforageneralequilibriumcomputationalapproachtotaxevasion.

Thefailure toconsider theseadjustmentscanleadtoavarietyofmistakes,orat leastomissions,allofwhichweillustratewithexamplesfromourownworkinordertodemonstratethatwearenotwithoutsin.

Theoretical Studies.As noted, most theoretical analyses of tax evasion focus on theindividualcompliancedecision,andsonecessarilyignoreanygeneralequilibriumimpactsoftheseindividualtaxcompliancechoices.Foratypicalexample,seeAlm(1988),whoextendsthestandardAllinghamandSandmo(1972)modelbutwhoretainsitsemphasisonasinglerepresentativeagentfacingfixed“prices”.

Experimental Studies.Much recent analysisof taxcompliancehasutilized laboratoryexperiments.Inatypicalexperiment,humansubjectsinacontrolledlaboratorysettingareaskedtodecidehowmuchincometoreport,wheretaxesarepaidatsomerateonallreported,notaxesarepaidonunderreportedincome,andunderreportingisdiscoveredandpenalizedwithsomeprobability.Intothismicroeconomicsystem,variouspolicychangescanbeintroduced,suchaschangesinauditprobabilitiesorauditrules,inpenaltyrates,intaxrates,inpublicgoodprovision,andinanyotherrelevantinstitutions.Virtuallyallaspectsofcompliancehavebeenexaminedinsomewayinexperimentalwork.

nowtherearesomeobviouslimitationsofexperimentalmethods,includingespeciallythesomewhatartificialnatureofthelaboratory.However,ofmostrelevancehereisthepartialequilibrium nature of all experimental studies of tax compliance.These studies typicallyexamineindividualcompliancechoicesinisolationfromthechoicesofotherparticipants,andthepossibleimpactofone’scompliancedecisionsonthereturnstootherparticipants’decisionsisseldomconsidered.Evenwhensomeinteractionsareconsideredvia,say,apublicgoodfinancedbyallsubjects’contributions,anendogenousauditselectionruledeterminedbyallsubjects’choices,orinformationexchangeamongthesubjects,thewaysinwhichthe“prices”facingsubjectsmaybeaffectedbycomplianceareneverconsidered.Thisdoesnotmeanthattheresultsfromthesemanyexperimentalstudiesareofnouse.Itdoesmeanthattheresultsareoflimitedrelevanceforsettingsinwhichcompliancechoiceshaveanoticeableimpactontheseprices.

Forexample,inatypicalexperimentalstudyAlm,Jackson,andMckee(2009)examinethecomplianceimpactoftypesofinformationdisseminationregardingauditfrequency,comparingtheeffectsof“official”informationdisseminatedbythetaxauthority,and“unofficial”,orinformal,communicationsamongtaxpayers.Theyfind that the taxauthoritycan improvecompliancebypre-announcingauditratescrediblyandbyemphasizingthepreviousperiod


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audit frequency inannual reportingofenforcementeffort.However, thebasicparametersfacingsubjectsarefixedandexogenoustothedecisionsofthesubjects,sothattherearenoadjustmentsthatmightalterthetaxadvantageofevasion.Evenwhenthechoiceofasubjectaffectsthepayoffstootherparticipantsthroughinformationexchange,therearestillno“price”adjustmentsintheexperimentaldesign.

Empirical Studies.ofperhapsmostrelevance,empiricalstudiesoftaxcompliancetypicallytaketheeconomicenvironmentasfixedandunaffectedbyindividualcompliancedecisions.Thisimplicitassumptionleadstoavarietyof“mistakes”.

Mostobviousisthetraditionalexerciseinpublicfinancethatexaminestheprogressivityorregressivityofaparticulartaxoroftheentiretaxsystem.Frequently,findingsofverticalandhorizontalincidenceareadjustedtotakeintoaccounttheimpactofexistingevasion,suchasinthecaseofprofessionalsorunskilledworkersemployedintheinformalsectoroftheeconomy.Theseadjustmentsaremadeundertheassumptionthattheevadinggroupsbenefitexclusivelyandinfullfromtheassumedtaxevasion.Indeed,Alm,Bahl,andMurray(1991)conductthistypeofanalysisforJamaica,inwhichtheygenerateestimatesoftheamountoftaxevasionthatoccursviaboththeunderreportingofincomeonfiledreturnsandthenonfilingofincometaxreturns.However,theyassumethattaxevadersretainallbenefitsfromtheirevasion.Inmanycasesthisimplicitassumptionisnodoubtincorrect,andtheresultingestimatesofthe“true”burdenoftaxationarethereforemisleading.Similarly,AlmandWallace(2007)arguethat,iflaborincomeismorelikelytobegeneratedintheuntaxedorinformalsectorthaniscapitalincome,thentheexistenceoftaxevasionmakesthetaxsystemmoreprogressive.However,iftheadvantagesrealizedbyworkersgetcapitalizedorcompetedawaybymarketprocesses,thenthisconclusionisincorrect.

We utilize these guidelines to illustrate several different approaches that analyze theincidenceoftaxevasion,asdiscussednext.

IV.APProAcHESToGEnErALEquILIBrIuMModELInG7

Herewepresentthreemodelsthatincorporatemanyofthe“essentialelements”neededforanalyzingthegeneralequilibriumeffectsoftaxevasion.Thesemodelsareprogressivelymorecomplicated.Evenso,theymaintainthebasicfeaturesofthesimplestHarberger(1962)model:“factorsubstitutioneffects”(e.g.,thetaxedfactorbearsmoreoftheburden),“factorintensityeffects”(e.g.,thefactorusedintensivelyinthetaxedsectorbearsmoreoftheburden),and“demandeffects”(e.g.,consumerswhopurchasemoreofthetaxedproductbearmoreoftheburden).Allofthesebasicfeaturesdeterminethefinalpatternoftheincidenceoftaxevasion.

4.1. The General Equilibrium Model of Alm (1985)

Alm(1985)examinestheimpactoftaxesthatcreateanincentiveforresourcestoflowfromthe“official”(ortaxed)sectorto“underground”(oruntaxed)sectors,definedasalleconomicactivitiesthatcontributetooutputbutthatarenotincludedinofficialstatistics.Inhismodel,astylizedeconomyisdividedintothreesectors:afullytaxedabove-groundsectorthatproduces

7 Inallcases,seetheoriginalpaper(Alm1985;AlmandSennoga2010;AlmandTurner2012)foracompletediscussionofthemodel,itscalibration,itssolution,anditsresults.


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outputX,anundergroundsectorYwhoseactivitiesaresubstitutesforthoseofthetaxedsector,and an underground sector Z inwhich traditionally criminal activities such as prostitution,gambling,anddrugdealingtakeplace.Bothundergroundsectorsareassumedtobeuntaxed.demandforeachoutputisassumedtobeafunctionofrelativeprices,andallagents(includinggovernment)areassumedforsimplicitytohavethesameaverageandmarginalpropensitytoconsumeeachcommodity.Eachgoodisproducedundercompetitiveconditionswithalinearlyhomogeneousproductionfunctionthatdependsupontheamountofcapital(K)andlabor(L).capitalandlaborareassumedtobefixedinsupplyintotal;theyarealsoassumedtobeperfectlymobileamongsectors.SincecapitalandlaborinsectorsYandZareassumedtobeuntaxed,thereareonlytworelevanttaxes:ataxoncapital(TK)andataxonlabor(TL)inthetaxedsectorX.Thetaxationofcapitalandlaborinonlysometheirusescreatesanincentiveforresourcestoflowfromthetaxedsector(X)totheuntaxedsectors(YandZ).Thismovementhasbothallocativeanddistributionaleffects;theallocativeeffectsarethefocusofAlm(1985),butthedistributionaleffectsarethefocushere.

Alm(1985)calibratesthemodelusingu.S.datafortheseparateyears1950,1960,1970,and1980.Healsomakesvariousassumptionsabouttherelevantparameters,suchastheelasticitiesofsubstitutionbetweencapitalandlaborandthecompensatedelasticitiesofdemand.Itturnsout that thecrucialelementaffectingthedistributionaleffects is thefactor intensities in theundergroundsectors,andAlm(1985)assumesthatthetwountaxedsectorsarelabor-intensive.As a result, the taxation of labor and capital in the above-ground sector generates generalequilibriumadjustmentsthatalwaysimposeagreaterburdenonthefactorusedintensivelyinsectorX(e.g.,thefactorintensityeffect),orcapital.Hiscalibrationalsodemonstratesthatthetaxrateoncapitalistypicallygreaterthanthatonlabor,sothatthehigherrelativetaxoncapitalinsectorX versuslaborinthesectorfurthergeneratesgeneralequilibriumadjustmentsthatalwaysreducetherelativepriceofcapital(e.g.,thefactorsubstitutioneffect).Finally,thesefactorandgoodsmovementsalwaysincreasethepriceoftheproductofsectorXrelativetothepricesofthetwoundergroundsectors,therebyimposingahigherburdenonconsumersofsectorX(e.g.,thedemandeffect).

overall,theburdenoftaxationoflaborandcapitalintheabove-groundsectorareclearlyshiftedbothtocapitalandtoconsumersoftheabove-groundproduct.Forexample,inatypicalsimulation,Alm(1985)estimatesthatmobilitydecreasesthepriceofcapitalrelativetolaborin1980by41to55percentcomparedtoitsinitialprice,dependingonthevariouselasticities.Similarly,thepriceofXincreasesbyroughly50percentandthepriceofYdeclinesbyabout2percent,bothrelativetothepriceofZ.Theseresultsarelargelyrobusttodifferentmodelassumptions.

However,Alm(1985)assumesasinglerepresentativeagent,mainlytofocusontheallocativeeffectsoftaxes.Asaresult,hecannotfullyexaminethedistributionaleffectsofthesegeneralequilibriumadjustments.Healsodoesnotallowforuncertaintyintheagent’sdecisions,sothathecannotexaminetheunderlyingtaxevasionchoicesoftheagent.

4.2. The General Equilibrium Model of Alm and Sennoga (2010)

AlmandSennoga(2010)addressatleastsomeoftheselimitations.Theyconstructageneralequilibriummodelofastylizedsmallstaticclosedeconomywithtwoconsumers,twofactors,andtwobroadlydefinedsectorscomposedofanabove-groundortaxedsectorthatproduces


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outputXandanunderground,informal,ortax-evadingsectorwhoseoutputYisasubstituteforthetaxedoutput.Theyincorporatetheindividual’sdecisiontoevade,andtheyalsoallowforvaryingdegreesofmobilityviacompetitionand/orentryacrosssectorsintheeconomy.Theirfocusisonmeasuringhowmuchoftheinitialtaxadvantageofevasionisretainedbyincometaxevadersandhowmuchisshiftedviafactorandcommoditypricechangesstemmingfrommobility.

Specifically,AlmandSennoga(2010)makeseveralmainassumptions:• Therearetwoconsumers,aPoorhouseholdworkingentirelyintheinformalsector

andarIcHhouseholdworkingonly in the formalsector; thePoorhousehold’sconsumption is relativelyY-intensive, and the rIcH household’s consumption isrelativelyX-intensive.

• Laborisvariableinsupply,withastandardlabor-leisurechoice,andisimperfectlymobileacrosssectors.

• capitalisfixedintotalsupply,imperfectlyhomogenous,imperfectlymobileacrosssectors,andfullytaxed.

• Laborincomegeneratedintheabove-groundsector(sectorX)isfullytaxedatratet.• Laborincomegeneratedintheundergroundsector(sectorY)ishiddenfromtheauthorities

andmayescapetaxation;however,thisincomemaybedetectedandpenalized.• consumptionofbothsectorsissubjecttoanindirecttaxatrateτ.• SectorXconsumptionisfullytaxed;sectorYconsumptionmayescapetaxation,but

thisindirecttaxevasionmaybedetectedandpenalized.• The above-ground sector (sectorX) is relatively capital-intensive, and sectorY is

labor-intensive.• Spendingandincomeofthegovernment(GoVT)aredisaggregatedfromthatofthe

consumers,sothatthegovernmentistreatedasaseparateconsumerthatcollectstaxesinordertoprovideapublicgoodcalled“publicadministration”.

Also,producersareassumedtomaximizeprofitstakingpricesasgiven,andconsumersareassumedtomaximizeutilitysubjecttoabudgetconstraintthatdependsuponthevalueoftheirendowments.Theseassumptionsimplythatproducersearnonlynormalprofitsandthatconsumerscannotincreaseconsumptionofallgoods.

AlmandSennoga(2010)calibratetheirmodelwithdatathatdonotrepresentanyparticularcountry,andarechosensomewhatarbitrarilytoreflectsectoralcompositionsina“typical”developingcountry.TheystartwithaSocialAccountingMatrix(SAM),constructedundertheassumptionthattheconsumersand/orproducersintheformalsectorfullymeettheirtaxobligationswhiletheircounterpartsintheinformalsectorfullyevadetaxes(i.e.,fullcomplianceintheformalsectorandtaxevasionintheinformalsector).Theyconstructtheirmodelsothatitsinitialequilibriumreplicatestherelevantbenchmarkdata,beforeintroducingapolicyinnovation(e.g.,achangeinataxrate,achangeinanexpectedpenaltyrate)andexaminingitsdistributionaleffects.

Table 1presentssometypicalresultsfromAlmandSennoga(2010).ThetoppartofTable 1 indicates that the Poorhousehold initially benefits from evasion but only somewhat.Thisinitialgainiscomputedusingthedefaultelasticityofsubstitutionbetweenleisureandconsumption,or2;tosimulatelong-runentry(i.e.,mobility)intotheinformalsector, this


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Table 1:GeneralEquilibriumEffectsinAlmandSennoga(2010)

Statutory ad valorem commodity tax = 0.1, Statutory proportional income tax rate = 0.25Expected penalty rate (commodity taxes) = 0.07, Expected penalty rate (income taxes) = 0.2

POOR Household RICH HouseholdMagnitude

(%)Percent Change

(%)

Magnitude(%)

Percent Change

(%)Initial Post-Evasion Welfare 2.43

-21.8-0.64

96.9Final Post-Evasion Welfare 1.90 -0.02Initial Price of Good X 5.99

-8.65.99

-8.6Final Price of Good X 5.47 5.47Initial Price of Good Y -6.30

9.8-6.30

9.8Final Price of Good Y -5.68 -5.68Initial Post-Evasion Rental Rate -0.89

365.1-0.89

365.1Final Post-Evasion Rental Rate 2.36 2.36Initial Post-Evasion Net Wage -4.02

-13.40.50

-184.0Final Post-Evasion Net Wage -4.56 -0.87Initial Post-Evasion Labor Supply 6.43

59.8-2.74

122.6Final Post-Evasion Labor Supply 10.28 0.62

Statutory ad valorem commodity tax = 0.1, Statutory proportional income tax rate = 0.25Expected penalty rate (commodity taxes) = 0.095, Expected penalty rate (income taxes) = 0.225

Initial Post-Evasion Welfare 1.08-23.2

-0.25112.0

Final Post-Evasion Welfare 0.83 0.03Initial Price of Good X 2.56

-9.42.56

-9.4Final Price of Good X 2.32 2.32Initial Price of Good Y -2.79

10.8-2.79

10.8Final Price of Good Y -2.49 -2.49Initial Post-Evasion Rental Rate -0.37

405.4-0.37

405.4Final Post-Evasion Rental Rate 1.13 1.13Initial Post-Evasion Net Wage -0.99

-25.20.60

-160.0Final Post-Evasion Net Wage -1.24 -0.36Initial Post-Evasion Labor Supply 2.80

59.6-1.18

130.5Final Post-Evasion Labor Supply 4.47 0.36

Notes:“Initial”referstotheoutcomewithlimitedcompetitionand/orentryintheinformalsector.“Final”refersto theoutcomewith increasedcompetitionand/orentry in the informalsector.“Magnitude” is thepercentagedifferencebetweenthepost-evasionandpost-taxoutcomeifbothPoorandrIcHhouseholdscompliedwithtaxes.“Percentchange”referstothepercentagechangebetweenthemagnitudeforthe“initial”and“final”outcome.ThesesimulationsareforthecasewheretherIcHhouseholdworksonlyintheformalsectorandthePoorhouseholdendowmentis33percentoftherIcHhouseholdendowment.

Source:AlmandSennoga(2010).


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elasticityinincreasedto8.8TheyfindthattheinitialbenefitofevasionforthePoorhouseholddissipates as entry into the informal sector expands. Specifically,Table 1 shows that thePoorhouseholdretains78.2percentoftheinitial2.4percentincreaseinitswelfare,while21.8percentofthisinitialgaininwelfareiseliminatedasaresultofentryintotheinformalsector.9TherIcHhousehold’swelfareinitiallyfallsby0.64percent,butmobilityreducesthislosstoonly-0.02percent,whichrepresentsa96.9percentincreaseinwelfarefortherIcHhouseholdarisingfrommobilityintotheinformalsector.TheincreaseintherIcHhousehold’scommodityX-intensivewelfareismainlyattributedtoareductioninthetax-inclusivepriceofcommodityXasmobilityintotheinformalsectoroccurs.

Table 1alsoshowsthatthetax-inclusivepriceofcommodityXfallsby8.6percentwithmobilityintotheinformalsector,whilethepriceofgoodYincreasesby9.8percent.BecausethePoorhousehold’swelfareisassumedtobeintensiveincommodityY,anincreaseinthecommoditypriceofgoodYreducesthePoorhousehold’swelfare.Further,mobilityincreasestheamountoflaborsuppliedbythePoorandrIcHhouseholdsby59.8percentand122.6percent, respectively, leading toareduction in theirnet-of-taxwagesby13.4percentand184.0percent,respectively.

Increasingtheexpectedpenaltyrateonlyaltersthesizeofthesechangesandnottheirdirection,asshowninthelowerpartofTable1.Perhapssurprisingly,theincreasedpenaltyrateleadstoafinallevelofwelfarethatisactuallyhigherforbothrIcHandPoorhouseholdsthanthelevelofwelfareachievedintheabsenceoftaxevasion.Thisresultillustratesthatevasioncanalleviatesomeofthelabormarketdistortionsassociatedwithtaxation,especiallywhenahighexpectedpenaltyrategenerateslargedistortions.other(unreported)counterfactualexperimentsreinforcetheseresults.

Acrossallexperiments,AlmandSennoga(2010)findthatahouseholdthatsuccessfullyevadesitsincometaxliabilitieshasapost-evasionwelfarethatisonly1.1to3.4percenthigherthanitspost-taxwelfareifithadfullycompliedwiththeincometax.Further,thishouseholdkeepsonly75.3to78.2percentofitsinitialincreaseinwelfare,while21.8to24.7percentofitsinitialgainiscompetedawayasaresultofmobilitythatreflectscompetitionandentryintotheinformalsector.Althoughtheinitialpost-evasionwelfareeffectisnegativeforthehouseholdthatcomplieswithincometaxes,itswelfareincreasesby87.5to142.3percentwithcompetitionandentryintheinformalsector.

Morebroadly,thecounterfactualexperimentsofAlmandSennoga(2010)indicatethatthetaxevaderdoesnotbenefitexclusivelyfromevasion.Indeed,theirresultsindicatethatany“taxadvantage”fromevasiondiminisheswithmobilityintotheinformalsector,aswellaswithanincreaseintheexpectedpenaltyassociatedwithtaxevasion;thatis,theevadinghouseholdbenefitsbutonlysomewhatfromtaxevasion,andthisadvantageshrinkssignificantlywithmobility.Theirresultsalsosuggestthattherearesomecircumstancesunderwhichtaxevasionactually increases thewelfareofallhouseholds,asevasion reduces someof thedistortingeffectsoftaxation.

WhilerepresentinganadvanceoverthesimplemodelofAlm(1985),AlmandSennoga(2010)stilldonotincorporateall“essentialelements”.Theydonotfullyallowformobility,

8 “Initial”referstotheoutcomewithlimitedcompetitionand/orentryintheinformalsector.“Final”referstotheoutcomewithincreasedcompetitionand/orentryintheinformalsector.

9 The“initial”gainorlossreferstothepercentagechangebetweenthepost-evasionandpost-taxwelfare.


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especiallymobilitythatcanbeaffectedbythedegreeofcompetitionintheproductionsectors.They also do not consider the potential for firm-level tax evasion.These limitations areaddressedbyAlmandTurner(2012).

4.3. The General Equilibrium Model of Alm and Turner (2012)

AlmandTurner(2012)assumeastylizedsmallstaticclosedeconomywithtwobroadlydefinedsectors,composedofanabove-groundortaxedsectorandanunderground,informal,ortax-evadingsectorwhoseoutputisasubstitutefortaxedoutput;theyalsoincorporateuncertaintyandvaryingdegreesofmobilityacrosssectorsintheeconomy.However,unlikeAlmandSennoga(2010),AlmandTurner(2012)modelfirmevasion,ratherthanindividualevasion.Theyalsoincorporatemoreexplicitlydifferentdegreesofcompetitionbyanalyzingseparatelyaperfectcompetitionmodeloffirmdecisionsandamonopolymark-upmodel.Theirfocusisonmeasuringhowmuchoftheinitialtaxadvantageofevasionisretainedbyincometaxevadersandhowmuchisshiftedviafactorandcommoditypricechangesstemmingfrommobility.

Specifically,AlmandTurner(2012)makeseveralmainassumptions:• Therearetwoconsumers,consumer1and2,withconsumer1’sconsumptionrelatively

x-intensive.• Therearetwogoods.• Therearetwoproducers(orproductionsectors):anon-evader(orcompliant)firm

withoutputX,andanevaderfirmwithoutputY,withtheevadingsectorrelativelylabor-intensive.

• Individuals/householdsmaximizeutilitysubjecttoabudgetconstraint,earningincomefromendowmentsoflaborandcapital.

• Producersmaximizeprofits(orexpectedprofits).• Therearetwotaxes,anadvaloremlabortaxandanadvaloremsalestax.• Twomarketcasesaremodeled:perfectcompetitionandmonopoly.

They conduct two main counterfactuals, one when there is perfect competition and asecondwhenthereismonopoly.Foreachofthesecounterfactuals,theymaketwodifferentcomparisons:betweenageneralequilibriumwithfullcompliancewiththerelevanttax(“Non-Evasion”)andanequilibriumwithevasion(“Evasion1”),andbetweenthepreviousevasionequilibrium(“Evasion1”)andoneinwhichtheelasticityofsubstitutionbetweenproductioninputsisincreasedcausingcapitalandlabortoflowmoreeasilybetweenproducersinsectors(“Evasion2”).Thecounterfactualsalsoallowforincreasesintheprobabilityofdetection,thefinerate,andthelabororsalestaxrate.

WepresentinTable 2somesummaryresultsonlyfromtheperfectcompetitionsimulationsandonlyforthelabortaxscenarios.Theresultsforthesalestaxscenarios,aswellasforthemonopolymarkupcase,arequalitativelythesame.

considertheperfectcompetitionsimulationsinTable 2fortheadvaloremlabortax.Thelabortaxwithoutanyevasion(Non-Evasion)lowersthepriceoflaborby44percent,andconsumer2’swelfaredecreasesrelativetothatofconsumer1duetoconsumer2’srelativelylargelaborendowment.Whenevasionoccurs(Evasion1)insector2withalowprobabilityofdetection(0.1)andalowfinerate(1.1)onevadedlabortaxes,thepriceoflaborincreasesby67.9percent(%∆Pre).Thepriceofcapitaldecreasesby20.1percent,andthustherelativepriceoflaborto


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capitalincreasesandlaborflowsfromsectorXtosectorY.ThismovementincreasesevadersectorYoutput,whichleadstoadecreaseinitsprice.Thewelfareofconsumer2increases(7.5percent)becauseconsumer2consumesalargershareofthesectorYgood.ThereallocationofcapitalandlaboralsoreducesXoutputby31.5percent,andincreasesitspriceby11percent.Thewelfareofconsumer1decreases(12.9percent)becauseconsumptionisX-intensive.

Table 2:GeneralEquilibriumEffectsinAlmandTurner(2012)

competition Increasedcompetition

non-Evasion Evasion1 %∆Pre Evasion2 %∆PostWelfare1 1.07 0.93 -12.9% 0.96 3.4%Welfare2 0.93 1.00 7.5% 0.95 -5.3%xoutput 1.02 0.70 -31.5% 0.81 15.8%Youtput 0.98 1.28 30.8% 1.11 -12.8%Pricex 1.69 1.87 11.0% 1.50 -20.1%PriceY 1.68 1.34 -20.5% 1.24 -7.4%capitalPrice 1.70 1.36 -20.1% 1.40 3.4%LaborPrice(net) 0.56 0.93 67.9% 0.84 -10.4%consumer1Income 179.71 155.08 -13.7% 135.20 -12.8%consumer2Income 156.84 146.56 -6.6% 123.82 -15.5%

Notes:%∆Prereferstothepercentchangeofevasionovernon-evasionbeforeincreasingcompetition,and%∆Postreferstothepercentchangeofevasionoverevasionafterincreasingcompetition.Anincreaseincompetitionisadjustedbyincreasingtheelasticityofsubstitutioninproductioninputs.Thesesimulationsareforthecasewherethereisapartialfactortaxonlaborunderperfectcompetition.

Source:AlmandTurner(2012).

When the elasticity of substitution between capital and labor is increased (Evasion2),laborflowsintotheevadersectorY,whichreducesthepriceoflaborby10.4percent;thatis,replicationandcompetitionhavereducedsomeofthebenefitsofevasioncomparedtoEvasion1.Thepriceofcapitalincreasesby3.4percent,andtherelativepriceoflabordecreases,causingareallocationofcapitalandlabortowardssectorX.Thenon-evadersectoroutputXincreasesby15.8percent,anditspricedecreasesby20.1percent.consumer1’swelfareincreasesby3.4percentasaresultoftheincreaseinXoutputandthelargeshareofXinutility.outputinsectorYdecreasesby12.8percent,anditspricedecreasesby7.4percent.Theincreaseinthesubstitutabilityoflaborandcapitalbetweenthetwosectorsleadstogreaterreplicationandcompetitionamonglaborandcapital,andtransfersthebenefitsofevasionviaanincreasednetwageoflaborawayfromlaborinsectorYtoconsumersintheformoflowerpricesofsectorYoutput.LaborenteringtheevadersectorYcompeteswitheachotherandbidsdownthenetwagewithevasion,thustransferringthebenefitsofevasiontothesectorYproducer.SectorYfirm’scostofproductiondecreasesasaresultofthedecreaseinthepriceoflabor,resultinginthetransferofbenefitstoconsumersintheformoflowerprices(e.g.,thepriceofYdecreasesby7.4percent).


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Inothersimulations,increasesintheprobabilityofdetection,thefinerate,andthelabortaxrateconfirmtheseresults.Inparticular,thebenefitsofevasionremainwiththeevadingsectorandbenefitthefactorusedmoreintenselythere(e.g.,labor),butwhentheelasticityofsubstitutionisincreasedtomakefactorinputsmorelikeperfectsubstitutes,thebenefitsofevasionarecompetedawaythroughreplicationandcompetition.

overall,AlmandTurner(2012)findthatthebenefitsofevasionmaybereplicatedandcompetedawaythroughentryorthroughreallocationoffactorinputs,dependingontherelativecompetitivenessof themarket.Further, industries inwhichone factor input isusedmoreintensivelythantheotherorinwhichthereismarketpowerwillbeabletoretainthesebenefits.

LikeAlmandSennoga(2010,thisapproachisanadvanceoverthesimplemodelofAlm(1985).Evenso,AlmandTurner(2012)stilldonotincorporateall“essentialelements”.Forexample,whileallowingforfirmevasion,theydonotconsiderindividualevasion.Thereisstillworktobedone.

V.concLuSIonS

distributionalconclusionsdrawnfromthestandardapproachtotaxevasionareunsatisfactorybecausethisapproachignoresthefactthattaxevasionismuchlikea“taxadvantage”inthelaw,sothatreplicationandcompetitionshouldworktowardtheeliminationofthisadvantage.Thisprocessofadjustmenttakesplacethroughchangesintherelativepricesofbothcommoditiesandfactorsofproduction,asmobilityoccursintoandoutoftherelevantsectors.Thestandardapproach takesonlyapartial equilibriumperspective, anddoesnot capture thesegeneralequilibriummobilityeffects.Thefailuretoconsidertheseeffectsleadstoawidevarietyof“errors”inthestandardanalysisoftaxevasion.

oncethesegeneralequilibriumeffectsareappropriatelymodeled,itistypicallyfoundthatthetaxevaderdoesnotbenefitexclusivelyfromevasion.Indeed,theseanalysesindicatethatanytaxadvantagefromevasiondiminisheswithmobilityintotheinformalsector,withgreatersubstitutionpossibilitiesinproduction,andwithgreaterdegreesofsectoralcompetition.Infact,therearesomecircumstancesunderwhichtaxevasionactuallyincreasesthewelfareofallhouseholds,asevasionreducessomeofthedistortingeffectsoftaxation.Inshort,thegainsfromevasionareshiftedatleastinpartfromtheevaderstotheconsumersoftheiroutputvialowerprices,asgeneralequilibriummobilityeffectsworkviarelativepriceandproductivitychangestoeliminatetheincentiveforworkerstoentertheinformalsectorbeyondsomemargin.

Therearemanypossibleextensionstothiswork,evenasidefromtheusualsensitivityanalyses.Theunderlyingframeworkcouldbegeneralizedtoconsidergreatertaxpayerheterogeneity,abroader rangeofgovernment activities, the impactofopeneconomyconsiderations, thepotentialforgovernmentcorruption,anddynamicincidencefactors.Animportantextensionhereistoincorporatemorefullymodelsofexpectedutility,andofnon-expectedutility.Itwouldbeinterestingtoexaminewhethertraditionaltaxequivalenceresultsstillholdinthepresenceoftaxevasion,suchasthepresumedequivalencebetweenaproportionalincometaxandaproportionalconsumptiontax(withanequalrateonallcommodities).

ofperhapsmostimportance,eventhesegeneralequilibriummodelsdonotincorporatesomeotheressentialelementsofthefiscalarchitecture,notablytheadministrativecostsoftaxationandthecompliancecostsoftaxation.


153

Thereislittledoubtthattherearesignificantcostsforgovernmentincollectingtaxes(orthe“administrativecosts”oftaxation).Theavailableevidencefromgovernmentbudgetaryinformationclearlyindicatesthatthebudgetcostofcollectingindividualincome,businessincome,andsalestaxesisgenerallyinexcessofonepercentoftherevenuesfromthesetaxesandcansometimesbesubstantiallyhigher.Similarly,implicitinmuchoftheevasionliteratureistheassumptionthatitiscostlessforindividualsandfirmstopaytheirtaxes.Thereislittlequestionthatthisissimplywrong.Therearenowanumberofestimates,derivedfromavarietyofmethodologies,oftheactualmagnitudesoftheindividualandfirmcompliancecostsintheunitedStatesandelsewhere(SlemrodandSorum1984;BlumenthalandSlemrod1996;Sandford1995).Theseestimatesvary,butoftensuggestthatcompliancecostscanrangefrom2to24percentofrevenuesforselectedtaxes.Intotal,thesestudiesclearlyindicatethatthecompliancecostsoftaxationaresignificant,oftenofcomparableorevenlargervaluesthanthemoretraditionalcalculationsoftheexcessburdenoftaxation.

Analysisofwhobenefitsfromevasionrequiresrecognitionofthedistributionaleffectsoftheseadministrativeandcompliancecosts,especiallyofthepriceeffectsthatemergeasindividualsandfirmsattempttoreduceand/oravoidthesecosts.Inconductingtheseanalyses,wethinkitunavoidablethatrigorousanalysiswillrequiretheuseofacomputablegeneralequilibriumframework,inwhichthedifferentconsiderationsaresequentiallylayered,oneatopanother,untilthefullmodelcapturesalloftherelevantfactors.computablegeneralequilibriumcomputationscanquantifywithastandardmeasurethetrade-offsthattaxesnecessarilycreate;theycanindicatetheareasinwhichourknowledgeisincomplete;theycanprovidespecificguidelinesinspecificcountrycircumstances;andtheycanprovideessentialinformationonwhoactuallybenefitsfromtaxevasion.

ultimately,wearehopeful that thegeneralequilibriumanalysisof taxevasioncanbeextendedtotheanalysisofcriminalactivitiesmorebroadly,ofwhichtaxevasionisonlyonesmallpart.Thesemanyextensionsawaitfuturework.

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