The article analyzes various approaches on individual taxpayer's reporting decision in the United States. Tax evasion appears to be a large and growing problem in the country. Despite obvious difficulties in measurement, the U.S. Internal Revenue Service estimates that the tax gap, or the amount of underreported federal income taxes, was $83-94 billion in 1987, and had grown at an annual rate of over ten percent since 1973. The analysis of the individual reporting decision has taken a variety of approaches. The underlying premise of nearly all of these approaches, at least those in economics, has been the same: individuals pay taxes because they fear detection and punishment. This economics-of-crime approach is based on traditional expected utility theory, which views a rational individual as weighing the expected utility of benefits from successful underreporting against the uncertain prospect of detection and punishment. There are, however, several fundamental problems with the existing applications of expected utility theory of taxpayer reporting. Although it is clear that detection and punishment cannot explain all compliance behavior. The frequency of audit in the country has fallen to less than one percent, and the additional penalties constitute only a fraction of the unpaid tax liability.

The Standard Fixed Payment Mortgage (SFPM) has been the dominant mortgage instrument in the United States for the last 50 years, and for much of this period it has performed well. However, during periods of high and volatile rates of inflation, the SFPM suffers from severe weaknesses. Foremost among these problems, from the standpoint of the borrower, is the tilt in the stream of real mortgage payments toward the initial years of the mortgage. For consumers unconstrained by capital market imperfections, this tilt is unimportant. However, a consumer is typically unable to borrow against expected higher future income, or against the nominal capital gains that accrue to the owner of a house over the life of the mortgage. In addition, common practices of mortgage lenders often limit mortgage payments to some fraction of income at the time of purchase. Together, these liquidity constraints create a mismatch between the time sequence of mortgage payments and income, a mismatch that reduces the number of borrowers who qualify for financing and that limits the value of the house purchased by those who do obtain financing.

A model of individual tax compliance behavior, including evasion and avoidance, is developed and estimated. The model recognizes the importance of marginal income tax rates, payroll tax contributions and benefits, and the probability of detection and the penalty on unpaid taxes. Share equations for avoidance, evasion and reported income are estimated using individual-level data. The estimation results indicate that the tax base rises with higher benefits for payroll tax contributions and falls with higher marginal tax rates; the base also falls with more severe penalties and more certain detection of evasion as individuals substitute towards avoidance income.