The Effects of Taxation on the Reported Proportion of Illegal Income
Do, Linh Ngoc Phuong
The purpose of this paper is to study the effects of different elements in the tax structure on the reported proportion of illegal income. These elements include the penalty rate, the deductible amount of fines or penalties, and the length of imprisonment related to the conviction of tax evasion. By creating a theoretical model of taxpayers’ expected utility, I am able to analyze the relation between the tax elements and the reported proportion of illegal income. The results show that a higher penalty rate, a lower level of deductibility, and a longer length of imprisonment increase the taxpayers’ percentage of voluntarily reported illegal income. The paper also discusses the model’s limitations, implication for public policy, and potentials for future research.