On the Excess Burden of Tax Evasion

Abstract

A simple model of tax evasion is presented leading to the following conclusions: (1) Tax evasion is a function of, inter alia, the marginal tax rate only if the probability of being caught is a function of undeclared income; (2) Tax evasion introduces uncertainty, which causes a utility loss. An example is presented showing that the excess burdens of tax evasion and the income tax are sometimes additive. Thus ignoring the excess burden of tax evasion will usually lead to underestimation of the total excess burden of a tax.