The mathematics of tackling tax evasion

Tax evasion

In recent years, economists have gained the luxury of actually being able to test their ideas in experiments involving the behaviour of real people. And one particularly new and promising area of experimental economics focuses on tax evasion, which ought to be of keen interest to many governments around the world.

A couple of years ago, Simon Gachter at the University of Nottingham carried out a number of experiments on the way people co-operate which had profound implications for tax evasion. Gachter’s conclusion was that people decide whether or not to pay taxes based on the behaviour of their peers. The implication is that in certain circumstances, tax evasion may be a kind of fashion that spreads through society like bell-bottomed jeans.

Today, Georg Zaklan from the University of Bamberg in Bavaria, Germany, and pals show just how this might work in the real world by constructing a model of tax evasion behaviour in society.

His society is an Ising spin model (most commonly used to show critical behaviour in magnetic materials) in which agents can chose to evade taxes or not based on the behaviour of their neighbours.

Sure enough, the model shows that without any control on tax evasion, the behaviour can spread rapidly, disappear equally quickly and re-appear again later (just like bell-bottoms).

But the beauty of Zaklan’s simulation is that it suggests a way in which governments can very easily prevent the spread of tax evasion. The team has modelled the effect of increasing the probability that a tax evader will be caught and show that a small increase could have profound effects on tax evasion.

So what governments should do is increase the number of tax audits they carry out (as well as making sure there are adequate punishments for offenders). Zaklan says the model implies that if only 1 % of the population is tax audited, tax evaders would be brought to heel for good.

That sounds interesting and might be worth a try in some countries, were it not for some important gaps in the paper.

The biggest of these is this: what evidence is there that tax evasion fluctuates in the real world in the way that the Ising model predicts? Zaklan doesn’t present any, so while this work is interesting, I’ll need some better evidence before I’m convinced that his model really describes what’s going on.

Ref: arxiv.org/abs/0805.0998: Controlling tax evasion fluctuations

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