Criminal Behavior, Sanctions, and Income Taxation: An Economic Analysis

Abstract Economic models of income‐producing crimes are usually formulated as a labor supply decision (or a portfolio problem) under uncertainty. As such, these models are easily affected by taxation. This paper incorporates the theory of taxation and risk taking into such a simple model of crime to derive results regarding the deterrent effects of alternative income tax rules. The key result is that taxation affects the level of crime not only by changing 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. Deterrence is shown in general to be a function not only of primary sanctions but also of tax rules and tax rates. The effects of taxation on crime when punishment takes the form of imprisonment are also considered. The precise results depend generally on attitudes toward risk and on the bases of comparison.