Journal Article

An evasive topic: theorizing about the hidden economy

Sandmo, Agnar

2012

Overview

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.

• Publisher: Springer US,Springer,Springer Nature B.V
• Subject: Behavioral decision theory / Business Taxation/Tax Law / Capital / Compliance / Costs / Decision making / Decisions / Economic policy / Economic systems / Economic theory / Economics / Economics and Finance / Expected utility / H26 / Income / Income taxes / Informal economy / Informal sector / Labor market / Labor supply / Optimal taxation / Preferences / Public Finance / Risk / Risk aversion / Smuggling / Studies / Tax avoidance / Tax evasion / Tax rates / Taxation / The hidden economy / Uncertainty / Utility theory / Wealth / Welfare state