Tax Evasion in an Open Economy

We consider a model where agents can invest their wealth at home and abroad. The resulting capital income is taxed by withholding taxes which are smaller than the final income tax rate. Therefore, evasion of capital income is advantageous. We look into the optimal portfolio decision and the evading behaviour of an agent when tax rates are changed. Moreover, we examine which governmental instrument is best suited to fight tax evasion and flight of capital to foreign countries.