Tax Evasion with the Impact of Tax Decay

Abstract

Public finance literature pays important attention to taxpayers' behavior patterns and their relationship with the tax authority, given some variables, such as morale, net income from taxes, punitive legislation and risks involved in tax evasion activity. The seminal work in this area of ​​knowledge is that of Alligham and Sandmo (1972), who initiated the discussion of the effect, in taxation, of the perception of risk by the taxpayer, according to portfolio decisions. The choice of the structure dedicated to tax inspection is private to the tax authority and circumscribed by numerous factors, which, consequently, limits the probability of detection. Another factor that limits the role of the tax authority is the so-called tax decay. In this context, the general objective of this research is to analyze the role of the probability of detection (not fixed), as a result of the full incapacity of State inspection, and of the institute of tax decay in the tax evasion decision of the taxpayer. Two specific objectives were pursued: (1) adaptation of the basic model of Alligham and Sandmo (1972), so that it could respond to the expected usefulness of the taxpayer in a context of variation in the probability of detection over time; and (2) empirical research using the adapted model and data on the Brazilian tax authorities' detection capacity and undertaking audit efforts according to the size of the taxpayer, in order to verify whether the limitation of the inspection structure in Brazil, coupled with tax decay, can influence the tax evasion decision. As a theoretical result, there is the suggestion of a function that meets the variability of the probability of detection over time, including the effect of tax decay. The empirical findings, in turn, demonstrate that, given the consequences related to the limitation of the structure of the Brazilian Federal Revenue and the imposition of tax decay, the strategy of concentrating audit efforts on the largest taxpayers is correct, provided that the tax authorities Brazilian government maintains an optimal inspection structure, which does not imply an excess of resources in view of the taxpayer's perception of risk