TAX EVASION AND ADMINISTRATIVE COSTS

This paper seeks to find if there is any merit in the position that tax evasion is justified in the presence of a leakage of taxpayers' money. Tax is modeled as a simple redistribution from entrepreneurs to workers. The conclusions are that in an indirect tax regime, an increase in the administrative cost coefficient warrants an increase in the tax evasion coefficient in order to maintain the welfare obtained at the lower administrative cost. However in a direct tax regime, an increase in the administrative cost coefficient must be accompanied by a decrease in the tax evasion coefficient in order to maintain the level of profit or the level of worker utility obtained at the lower administrative cost. With direct taxes, the levels of both profits as well utility cannot; be simultaneously preserved with a higher administrative cost coefficient.