SFB 303 Discussion Paper No. A - 377

Author: Tillmann, Georg
Title: Tax Evasion in an Open Economy
Abstract: This paper addresses the following questions: How should an individual split up his capital concerning inland and foreign investments? If he has a portfolio of those assets how much interest income should he evade, how should he react to changing tax parameters? These questions concern the individual level, but as already Kolm (1973) has mentioned the government has a global view, interested in other aims. How, for example, should a government set taxes, fine parameters and audit probability to obtain maximal tax receipts and to hinder a huge capital exodus at the same time, which could lead to a big shortage of capital in the home country? We start in section 2, describing a simple model with agents whose income is composed of wage income and interest income. The latter comes from investments at home and abroad. Income is taxed at souce, however, with different rates. The taxes on interest income may differ and are smaller than the tax rate on wage income. Moreover, we assume that evasion of foreign interest income cannot be detected. Having explained the model, in section 3 we consider the optimal portfolio decision and in section 4 how and how much the agent evades. In section 5 we do comparative statics, i.e. we scrutinize how the portfolio changes when the fine parameters and the tax rate are modified. Going over to a global point of view in section 6 we analyse how a government that tries to maximize tax receipts should set the instruments it has available, taking into account that for every consumer flight of capital is possible. After some concluding remarks in section 7 all proofs are given in section 8.
Creation-Date: January 1992
Unfortunately this paper is not available. Please order a hardcopy via e-mail.

SFB 303 Homepage

19.10.1999, Webmaster