Theoretical analysis of the connection between taxation and risktaking has mainly been concerned with the effect of taxes on portfolio decisions of consumers, Mossin (1968b) and Stiglitz (1969). However, there are some problems which are not naturally classified under this heading and which, although of considerable practical interest, have been left out of the theoretical discussions. One such problem is tax evasion. This takes many forms, and one can hardly hope to give a completely general analysis of all these. Our objective in this paper is therefore the more limited one of analyzing the individual taxpayer’s decision on whether and to what extent to avoid taxes by deliberate underreporting. On the one hand our approach is related to the studies of economics of criminal activity, as e.g. in the papers by Becker ( 1968) and by Tulkens and Jacquemin (197 1). On the other hand it is related to the analysis of optimal portfolio and insurance policies in the economics of uncertainty, as in the work by Arrow ( 1970), Mossin ( 1968a) and several others. We shall start by considering a simple static model where this decision is the only one with which the individual is concerned, so that we ignore the interrelationships that probably exist with other types of economic choices. After a detailed study of this simple case (sections
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