Evading Taxes by Selling for Cash.

Cash sales represent an oportunity to evade indirect taxes. The incentive for both buyer and seller to engage in such transactions is investigated. Demand for cash sales is modeled as a function of cash-transaction costs; supply as a function of the gains from being able to price discriminate. The comparative statics of the model reveal the strength of the degree of enforcement to be an important determinant of whether evasion rises or falls with the tax rate. The possibility of holding consumers liable for indirect tax evasion is also investigated. This reveals the importance of levying new fines on consumers. Simply transferring to them a share of the penalty liability currently borne by the firm is more likely to increase evasion. Copyright 1990 by Royal Economic Society.