Tax evasion: An Exercise with Principal Agent Model

Abstract

This paper defines the concept of tax evasion, catalogues the various factors affecting the tax evasion and outlines a feasible solution of it. People are evading taxes mainly because of the tax burden, tax limitations and the poor structure of the tax system. The principal agent model is the basic framework on which the study tries to link tax evasion by the tax payer as agent and the tax collection authority as the principal. Tax authorities usually want to minimize the incentive whereas tax payers want to maximize their utility so more or less minimizing incentives may lead to the tax evasion. The study asserts that there is always a temptation by a risk averse person to evade taxes in the absence of incentive by the tax collection authority.