Tax evasion and uncertainty in a dynamic context

- We study optimal dynamic tax evasion in an uncertain setting.
- We find that greater uncertainty affects consumption, not the optimal tax evasion rule.
- We show that institutional uncertainty is not a good instrument to reduce tax evasion.
- We argue that instruments based on controls and sanctions are more effective.

We study optimal dynamic compliance decisions in an uncertain environment. Contrary to the static literature, greater uncertainty affects consumption, not the optimal tax evasion rule. Thus, audit and sanctions rather than fiscal uncertainty should be used to control tax evasion.