۱- Introduction

۲- Model

۳- Comparative statics of network interaction

۴- Audit targeting and network structure

۵- Conclusion

References

Abstract

We relate tax evasion behavior to a substantial literature on social comparison in judgements. Taxpayers engage in tax evasion as a means to boost their expected consumption relative to others in their social network. The unique Nash equilibrium of the model relates optimal evasion to a (Bonacich) measure of network centrality: more central taxpayers evade more. Given that tax authorities are now investing heavily in big-data tools that aim to construct social networks, we investigate the value of acquiring network information. We do this using networks that allow for celebrity taxpayers, whose consumption is seen widely, and who are systematically of higher wealth. We show that there are pronounced returns to the initial acquisition of network information, especially in the presence of celebrity taxpayers.

Introduction

Tax evasion is a significant economic phenomenon. Estimates provided by the UK tax authority put the value of the tax gap – the difference between the theoretical tax liability and the amount of tax paid – at 6.5% (H.M. Revenue and Customs, 2016). Academic studies for the US and Europe put the gap substantially higher, at around 18–۲۰% (Cebula and Feige, 2012; Buehn and Schneider, 2016). In this paper we link evasion behavior to a mass of evidence that people engage in comparisons with others (social comparison). Utility, evidence for developed economies suggests, is in large part derived from consumption relative to social comparators, rather than from its absolute level (e.g., Ferrer-i Carbonell, 2005; Luttmer, 2005; Clark and Senik, 2010; Mujcic and Frijters, 2013). The evolutionary processes that might explain this phenomenon are explored in Postlewaite (1998), Rayo and Becker (2007) and Samuelson (2004), among others. Researchers have proposed that social comparison can explain economic phenomena including the Easterlin paradox (Clark et al., 2008; Rablen, 2008), stable labor supply in the face of rising incomes (Neumark and Postlewaite, 1998); the feeling of poverty (Sen, 1983) the demand for risky activities (Becker et al., 2005) and migration choices (Stark and Taylor, 1991).