Income Tax Evasion Dynamics: Evidence from an Agent-based Econophysics Model

TL;DR

This paper introduces a novel multi-dimensional Ising model to analyze income tax evasion dynamics, capturing complex social interactions and policy effects in large societies with diverse agent types.

Contribution

It develops an inhomogeneous multi-dimensional Ising model that integrates social behavior, enabling analysis of complex agent interactions and policy impacts on tax evasion.

Findings

Model reproduces standard tax evasion features.

Analyzes effects of enforcement scenarios.

Provides policy implications for tax compliance.

Abstract

We analyze income tax evasion dynamics in a standard model of statistical mechanics, the Ising model of ferromagnetism. However, in contrast to previous research, we use an inhomogeneous multi-dimensional Ising model where the local degrees of freedom (agents) are subject to a specific social temperature and coupled to external fields which govern their social behavior. This new modeling frame allows for analyzing large societies of four different and interacting agent types. As a second novelty, our model may reproduce results from agent-based models that incorporate standard Allingham and Sandmo tax evasion features as well as results from existing two-dimensional Ising based tax evasion models. We then use our model for analyzing income tax evasion dynamics under different enforcement scenarios and point to some policy implications.