Tax evasion under differential taxation. The economics of income source misreporting

If different income sources are subject to different rates of taxation, a taxpayer may find it worthwhile to evade taxes by declaring part of his higher-taxed income as stemming from a lower-taxed source. This paper inquires into the determinants of income source misreporting, focusing on the relationships between misreporting and taxation under alternative penalty schemes. Allowing the taxpayer the choice between source misreporting and pure underreporting, the paper examines also the relative amount of tax escaping the tax collector through the alternative forms of evasion and determines the conditions under which one will be preferred to the other.