Income tax evasion: the conundrum of compliance

This thesis consists of two parts. Part I constitute a review on income tax evasion literature. The focus is particularly on the economic and non-economic factors that relates to individuals’ optimal tax reporting decision, and the determinants describing individuals’ tax evasion behaviour. The starting point of the review is the theoretical paper by Allingham & Sandmo (1972) in which they compared the tax reporting decision to a gamble, and identified (albeit ambiguous) effects on individuals’ tax evasion behaviour, by changes in the economic policy factors (tax rate, audit probability, and fine). Subsequent research has developed theory by improving, expanding, critiquing and challenging this first simplistic portfolio model. In this review I also visit principal-agent models, game theory models, dynamic stochastic inter-temporal models, and one recent framework considering behavioural economics. I also take a look at empirical research, particularly to investigate determinants which may allow tax authorities to identify tax evaders. I find that theory agrees on the importance of audit policies. Part II empirically explores a recently developed theory; the “slippery slope” framework. It aims is to validate the assumptions that high “trust in authorities” and high “power of authorities” are associated with high levels of tax compliance (and vice versa) by performing a cross-sectional study. I am unable to conclude on my main hypothesis. However, the salvaged results do provide support in the assumption of trust. PDF, dat