Tax audits, fines and optimal tax evasion in a dynamic context

In a dynamic optimisation framework we show that the optimal tax evasion can be either a positive or a negative function of the tax rate according to the form of the fine to be paid when evasion is detected.

► We model capital tax evasion in a dynamic framework. ► The optimal dynamic tax evasion and consumption path are determined. ► We study the effect of fine and audit on the accumulation path. ► Optimal evasion may be either increasing or decreasing in the tax rate. ► The form of the penalty determines the sign of the above relationship.