Dynamic Tax Evasion with Habit Formation in Consumption

We model the optimal intertemporal decision of an agent who chooses tax evasion and consumption, over an infinite lifetime horizon, where consumption is driven by habits. We find that: (i) tax evaders reduce consumption in the early stages of habit accumulation and increase it ove rtime; (ii) habit formation has a dampening effect on tax evasion; (iii) neglecting tax evasion may lead to habit overestimation; (iv) the effect of the tax rate on tax evasion is ambiguous; and (v) heavy fines are more efficient than frequent controls in reducing tax evasion.