Abstract
This paper examines the effect of an increase in the tax rate on tax evasion in a model where taxpayers report their incomes and pay the taxes first, and the penalties are imposed later if evasion is caught. When the penalty is imposed on the undeclared income, an increase in the tax rate leads to more evasion. If the penalty is imposed on the evaded tax, the effect of the tax rate on evasion depends on the level of income. With savings, the relationship between tax rates and evasion depends additionally on the preferences toward risk and the penalty rate.
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