Income Tax Evasion

by

John Minkes

• LAST REVIEWED: 31 August 2015
• LAST MODIFIED: 31 August 2015
• DOI: 10.1093/obo/9780195396607-0188

Introduction

Academic writing on the subject of income tax evasion is a fairly recent phenomenon with few sources dating to before the late 1950s and a surge in interest from the 1980s onward. Most of the contributions are from economists, augmented in more recent years by behavioral economists and economic psychologists. Criminologists have been largely silent on the topic, even in criminological texts about white-collar crime. This is consistent with the general focus of criminology on what are often termed “conventional” crimes such as burglary, theft, and physical assaults, but it also reflects the difficulties associated with researching what is largely a hidden crime. For instance, tax authorities rarely initiate criminal prosecutions for income tax evasion, preferring instead to reach negotiated settlements with noncompliant taxpayers. These are classified as confidential tax matters, and thus access to individuals who have evaded income tax is rarely possible and one obvious avenue of research is closed. Therefore, although this article is intended primarily for criminologists, it draws largely on literature from other academic disciplines, chiefly those mentioned above—economics, behavioral economics, and economic psychology. The first of these treats tax evaders as amoral calculators who make decisions solely on the basis of whether the financial benefits outweigh the potential losses, and constructs economic models to determine the impact of, for example, different tax rates or levels of sanctions for evasion; the basic model is usually referred to as the Expected Utility Model, or EUT. The other two disciplines investigate the social and psychological factors that influence tax compliance and noncompliance. Defining income tax evasion may appear simple, but there is often a fine line between tax evasion and tax avoidance. The distinction most commonly made is between illegal evasion—failing to meet one’s liabilities under taxation legislation, and lawful avoidance—attempting to minimize one’s tax liabilities by legal means. It can be a fine distinction, especially when avoidance becomes “aggressive tax planning.” This led to the coining of the term “tax avoision” to denote financial arrangements that are located on the margins of legality. It should also be noted that evasion is not always due to deliberate concealment; it may be caused by error or ignorance as well as deliberate concealment. The focus of the article is on evasion by individual taxpayers rather than corporations or other organizations, and it deals with taxes on income as opposed to other taxes such as value added or sales taxes or excise duty. Some of the sources cited do include some reference to evasion by businesses or evasion of other taxes in addition to income tax, but all of them deal solely or mainly with income tax evasion by individual taxpayers.

General Overviews

Much of the literature on income tax evasion has been published in the form of journal articles. Some of these are reviews of theoretical analysis and research findings, and these are included here along with Cullis and Jones 2009, an example of a general textbook on the economics of public finance, and Lewis 1982, a study of the broad topic tax behavior from a psychological perspective. However, many articles that claim to review the field deal exclusively with the economic approach, so these are included in the section entitled “The Economic Model” Cowell 1990; Andreoni, et al. 1998; and Slemrod 2007, although essentially rooted in economic analysis, all attempt to incorporate factors beyond rational calculation to counter some of the limitations of the economic model, in particular its failure to explain high levels of compliance. Smith and Kinsey 1987 offers a slightly different perspective based mainly on prospect theory while incorporating other factors and acknowledging the complexity of the decision making involved. Alternative perspectives are offered in Elffers, et al. 2006; Kirchler 2007; and Braithwaite and Wenzel 2008 that describe the economic model but reject its principle assumptions about human conduct and decision making in favor of approaches based more on psychological and behavioral science. Of these, Kirchler 2007 is the most comprehensive and should be regarded as an absolutely essential text.

• Andreoni, J., B. Erard, and J. Feinstein. 1998. Tax compliance. Journal of Economic Literature 36.2: 818–860.

  A comprehensive review of the major empirical and theoretical findings in recent tax evasion literature. The authors argue for greater integration of theoretical models and empirical research and more study of moral, social, and psychological factors in order to integrate them into economic models of compliance, in particular to explain the high rates of compliance that the latter cannot explain.

• Braithwaite, V., and M. Wenzel. 2008. Integrating explanations of tax evasion and avoidance. In Cambridge handbook of psychology and economic behaviour. Edited by A. Lewis, 304–331. Cambridge, UK: Cambridge Univ. Press.

  DOI: 10.1017/CBO9780511490118

  Braithwaite and Wenzel describe Expected Utility Theory and its dominant position in early research but contrast alternative explanations from a broader base. They propose a “wheel of social alignment of taxpayers” that shows how the design of the tax system interacts with factors such as perceptions of justice, benefits, and the level of coercion to affect compliance.

• Cowell, F. 1990. Cheating the government: The economics of tax evasion. Cambridge, MA: MIT.

  Cowell offers a full and clear overview of the application of economic analysis to the problem of tax evasion. His main concern is to broaden Expected Utility Theory to include the impact of factors such as social controls and varied motivations for offending or refraining from doing so, and the implications for tax enforcement policy.

• Cullis, J., and P. Jones. 2009. Public finance and public choice: Analytical perspectives. 3d ed. Oxford: Oxford Univ. Press.

  One of a number of general textbooks on public finance that includes chapters on “Tax Theory: The Basic Concepts” and “Tax Evasion and the Black Economy.” It gives a clear and fairly concise account of both the economic model and the contribution of behavioral economics. They also discuss measuring the “black” economy and the “optimal level” of tax evasion, which has an impact on decisions about trying to control it.

• Elffers, H., P. Verboon, and W. Huisman. 2006. Preface. In Managing and maintaining compliance. Edited by H. Elffers, P. Verboon, and W. Huisman, v–x. The Hague: Boom Legal.

  Elffers et al. describe the drawbacks of Expected Utility Theory and review alternative models of compliant behavior, as well as outline the content of the book, much of which proposes a “normative or positive, non-deterrence approach” (p. vii), emphasizing rewarding compliance, communications as a means of influence, reintegrative shaming, and putting responsibility on to the regulated.

• Kirchler, E. 2007. The economic psychology of tax behaviour. Cambridge, UK: Cambridge Univ. Press.

  DOI: 10.1017/CBO9780511628238

  This is the most comprehensive review of the literature of both the economic approach and the newer economic-psychological approach, including what Kirchler himself has written elsewhere about and the importance of the tax authorities’ cultivation of trust. Although strongly favoring his own approach, Kirchler cautions that research is still in its infancy, providing merely isolated results rather than an integrated model of tax behavior.

• Lewis, A. 1982. The psychology of taxation. Oxford: Martin Robertson.

  Lewis gives a general introduction to the subject of the study of taxation as a whole and of the psychology of taxation. He emphasizes the importance of attitudes and reviews research findings from social surveys in Europe and the United States, and relates this to the problem of tax evasion, going on to compare different proposals for its reduction.

• Slemrod, J. 2007. Cheating ourselves: The economics of tax evasion. Journal of Economic Perspectives 21.1: 25–48.

  DOI: 10.1257/jep.21.1.25

  Although focusing mainly on the economic modeling approach, Slemrod also reviews behavioral approaches as well as data sources on the extent of evasion (by individuals and by businesses) and theoretical developments, and the implications for tax policy.

• Smith, K., and K. Kinsey. 1987. Understanding taxpaying behavior: A conceptual framework with implications for research. Law and Society Review 21.4: 639–663.

  DOI: 10.2307/3053599

  A review of research and empirical findings, in which they favor prospect theory but with the additional consideration of social and psychological factors. Overall, they present a picture of very complex decision making that presents substantial challenges for methodology.