Investigating Tax Evasion Emergence Using Dual Large Language Model and Deep Reinforcement Learning Powered Agent-based Simulation

TL;DR

This paper introduces a novel agent-based simulation framework using Large Language Models and Deep Reinforcement Learning to study the emergence and dynamics of tax evasion and informal economies.

Contribution

It presents a new computational approach that allows informal economic behaviors to emerge organically without prior assumptions, enhancing understanding of socio-economic determinants.

Findings

Personality traits influence evasion timing and extent.

Enforcement and public goods provision are mutually reinforcing.

Efficient enforcement alone is insufficient to reduce informal activity.

Abstract

Tax evasion, usually the largest component of an informal economy, is a persistent challenge over history with significant socio-economic implications. Many socio-economic studies investigate its dynamics, including influencing factors, the role and influence of taxation policies, and the prediction of the tax evasion volume over time. These studies assumed such behavior is given, as observed in the real world, neglecting the "big bang" of such activity in a population. To this end, computational economy studies adopted developments in computer simulations, in general, and recent innovations in artificial intelligence (AI), in particular, to simulate and study informal economy appearance in various socio-economic settings. This study presents a novel computational framework to examine the dynamics of tax evasion and the emergence of informal economic activity. Employing an agent-based simulation powered by Large Language Models and Deep Reinforcement Learning, the framework is uniquely designed to allow informal economic behaviors to emerge organically, without presupposing their existence or explicitly signaling agents about the possibility of evasion. This provides a rigorous approach for exploring the socio-economic determinants of compliance behavior. The experimental design, comprising model validation and exploratory phases, demonstrates the framework's robustness in replicating theoretical economic behaviors. Findings indicate that individual personality traits, external narratives, enforcement probabilities, and the perceived efficiency of public goods provision significantly influence both the timing and extent of informal economic activity. The results underscore that efficient public goods provision and robust enforcement mechanisms are complementary; neither alone is sufficient to curtail informal activity effectively.