Supervised tax compliance and evasion from a spatial evolutionary game perspective

TL;DR

This paper models tax compliance and evasion using a spatial evolutionary game on interdependent networks, revealing how penalties, salaries, and corruption influence compliance and regulator fairness.

Contribution

It introduces a novel interdependent network model combining citizens and regulators in a public goods game framework with complex dynamics.

Findings

Strengthening penalties reduces tax evasion effectively.

Bribery has a nonlinear impact on compliance and regulator fairness.

Higher salaries and crackdown efforts promote fair regulators and decrease evasion.

Abstract

Taxation constitutes a fundamental component of modern national economic systems, exerting profound impacts on both societal functioning and governmental operations. In this paper, we employ an interdependent network approach to model the coevolution between citizens and regulators within a taxation system that fundamentally constitutes a public goods game framework with complex interactive dynamics. In a game layer, citizens engage in public goods games, facing the social dilemma of tax compliance (cooperation) versus evasion (defection). Tax compliance supports the sustainability of public finances while tax evasion presents markedly stronger short-term incentives. In a regulatory layer, fair regulators punish tax evaders, while corrupt regulators keep silent due to bribes. Governmental regulatory interventions introduce critical institutional constraints that alter the traditional equilibrium of the game. Importantly, there exists a strategy update not only among citizens but also among regulators. Our results indicate that strengthening penalties can effectively curb tax evasion, and the influence of bribery on both tax compliance rates and the proportion of fair regulators is nonlinear. Additionally, increasing regulators' salaries and intensifying the crackdown on corrupt regulators can foster the emergence of fair regulators, thereby reducing tax evasion among citizens. The results offer practical policy implications, suggesting that balanced deterrence and institutional fairness are essential to sustaining compliance, and point to the need for future empirical validation and model extensions.