A game theoretic approach to cross-border VAT evasion within EU member states and its relationship with the black economy

The interruption of the VAT chain at national borders makes several types of tax fraud possible. One is the multi stages black VAT chain in the domestic markets of various countries, which facilitates the development of a black economy favouring the evasion of income tax, social security contributions and other market regulations, including the protection of intellectual property and of brands. We devise a stylised model of Nash equilibrium-black chain for the “VAT-free goods”, depicting its effects on both market prices and illegal gains for fraudsters. The policy implications of the model aiming to contrast the black economy are analysed.