Criminal behavior, sanctions, and income taxation: An economic analysis

Taxation in general and income taxation in particular affect many decisions of individuals and firms. In this dissertation I explore the effects of income taxation on crime. In particular, I incorporate the theory of taxation and risk-taking into models of income-producing crimes, which are usually formulated as labor supply, portfolio allocation problems under uncertainty, and examine the deterrent effects of three important income tax issues: the taxation of legal and criminal income; the tax treatment of monetary sanctions; and the tax treatment of nonmonetary sanctions, namely, imprisonment.; The key insight of the analysis is that taxation affects the level of crime not only by changing the relative returns from legal and criminal activities, but also because it may affect the riskiness of crime and the willingness of offenders to assume risk. The net effect of taxation may lead to new, surprising results. For example, contrary to conventional wisdom, taxing legal and exempting criminal activities from taxation may not necessarily result in more crime. In addition, a pure income tax regime may increase the level of crime, and it will do so unambiguously under certain conditions. On the other hand, the current U.S. income tax laws under which legal and criminal income are taxable and fines are nondeductible reduce crime unambiguously. In general, deterrence is shown to be a function not only of primary sanctions, but also of tax rules and tax rate. The effects of taxation on imprisonment, on risk seeking offenders, and on the labor-leisure choice are also considered. For example, when punishment takes the form of imprisonment, the tax system operates effectively as a partial deductibility regime.; In this dissertation I also examine how the Supreme Court, Congress, and legal scholars have analyzed the issues at hand. I criticize traditional tax policy analysis and tax norms such as the Haig-Simons definition of income, horizontal equity, and neutrality as methods to evaluate tax rules. Instead, I suggest an evaluation of the desirability of alternative tax rules on the basis of their effects on efficiency and social welfare. The analysis in this dissertation provides the basis for such exploration.