Analysing tax evasion dynamics via the Ising model

TL;DR

This paper models tax evasion dynamics using the Ising model, incorporating enforcement mechanisms like audits and punishments, demonstrating effective control of evasion through policy interventions.

Contribution

It introduces a novel application of the Ising model to tax evasion, integrating enforcement strategies to analyze their impact on compliance.

Findings

Tax evasion can be significantly reduced with effective enforcement.

Punishment mechanisms increase honest behavior among taxpayers.

Simulation results support policy strategies for curbing evasion.

Abstract

We develop a model of tax evasion based on the Ising model. We augment the model using an appropriate enforcement mechanism that may allow policy makers to curb tax evasion. With a certain probability tax evaders are subject to an audit. If they get caught they behave honestly for a certain number of periods. Simulating the model for a range of parameter combinations, we show that tax evasion may be controlled effectively by using punishment as an enforcement mechanism.