Tax evasion by risk-averse firms in Greece: a discrete Markov-based optimization model

Nick Goumagias, Dimitrios Hristu-Varsakelis

Research output: Contribution to journalArticlepeer-review

2 Citations (Scopus)

Abstract

We present a Markov-based model of the process via which a ‘representative’ Greek risk-averse firm decides the degree to which it should engage in tax evasion. The model is constructed around a simplified version of the Greek tax system which includes random audits and penalties for under-reporting profits. For its part, the firm is allowed to manipulate its stated profits, potentially exposing itself to future penalty payments, in an attempt to maximize the expected utility of its after-tax wealth. Using our model, we determine the optimal behaviour expected of the firm as a function of the parameters of the tax system, and identify subsets of the audit probability – tax penalty space which ‘remove’ the inventive for tax evasion. This allows us to – among other things – evaluate the effectiveness of the parameter values currently in use and determine the implied level of risk-aversion for the average Greek firm.
Original languageEnglish
Pages (from-to)1153-1167
JournalOptimization
Volume62
Issue number8
Early online date19 Jul 2012
DOIs
Publication statusE-pub ahead of print - 19 Jul 2012

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