THE INDIVIDUAL TAXPAYER UTILITY FUNCTION WITH TAX OPTIMIZATION AND FISCAL FRAUD ENVIRONMENT

Abstract

In this paper I examine a taxpayer utility function determined by the extended set of variables – i.e. consumption, labor and tax-evasion propensity. This constitutes the main framework for the analysis of taxpayer’s decision making process under assumption that in the economy there exist two main reduction methods: a) access to tax optimization techniques, which may decrease effective tax burden and are fully compliant with binding laws, but generate transactional costs and 2) possibility of fiscal fraud – in particular tax evasion, as the alternative method of reducing tax due, which has no direct transactional costs, but involves tax litigation risk.