Is There Any Induced Demand for Tax Evasion?

Abstract

In this paper we consider amoral taxpayers who access amoral tax preparers in order to receive help in evading taxes. Taxpayers are aware of having a biased perception of the audit probability, but are unable to correct such bias without the help of a tax preparer. The market for tax preparation, characterized by imperfect competition, is described according to the conjectural variation approach. We show that according to the direction of the bias the tax preparer can suggest either a larger or a smaller evasion with respect to the one that the taxpayer would have implemented without the advice, resulting in an evasion smaller or larger than that observed in tax reports of unbiased taxpayers. Such ambiguity provides a motivation for the ambivalent attitudes of tax administrations towards tax preparers. It also turns out that sanctions on taxpayers are more effective than sanctions on tax preparers in order to deter tax evasion.