Stochastic compliance/evasion dynamics in tax models: a piecewise deterministic Markov process approach

Abstract

This paper introduces a novel stochastic framework for modelling tax evasion dynamics by extending the deterministic model of Bertotti and Modanese (2018) through the use of Piecewise Deterministic Markov Processes (PDMPs). A key limitation of the original model is the static treatment of taxpayer compliance and evasion behaviour. We address this limitation by incorporating two stochastic mechanisms:(i) audits, where random enforcement events shift non-compliant individuals toward compliance, and (ii) imitation, where social influence drives compliant individuals toward evasion. We develop each mechanism as a separate PDMP, proving that both preserve the fundamental conservation laws of population and global income. Numerical simulations show that these mechanisms produce opposing long-term outcomes: pure audits lead to full compliance, while pure imitation leads to full evasion. The central contribution is a combined PDMP model in which both dynamics interact. This model no longer converges to an extreme equilibrium state. Instead, it can exhibit persistent fluctuations around the deterministic trajectory and suggests convergence to a stationary distribution, providing a more realistic representation of compliance-evasion dynamics observed in real economies. The proposed framework offers a versatile approach for integrating behavioural stochasticity into socio-economic models.