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Tax Evasion and Government Size - A Micro-Political Theory

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Author Info

  • K. L. Glen Ueng

    (Department of Public Finance, National Cheng-Chi University, Taiwan)

  • C. C. Yang

    (Institute of Economics, Academia Sinica, Taiwan and Department of Public Finance, National Cheng-Chi University, Taiwan)

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    Abstract

    Previous studies on tax evasion and government size have not specified the "political mechanism" through which increasing difficulties with tax evasion might lead to government expansion. This paper attempts to fill in the gap. We extend the celebrated Meltzer and Richard (1981) model to a plausible world where tax evasion is possible. It is shown in this extended model that: (i) the decisive voter is still the individual who has a median pre-tax income, and (ii) the presence of tax evasion will lower the redistributive benefit of taxation and enhance the distortionary cost of taxation facing the decisive voter at the margin. As tax evasion becomes increasingly difficult with "modernization," the marginal redistributive benefit of taxation will be enhanced and the marginal distortionary cost of taxation will be mitigated. This provides tax-evasion routes with a micro-political foundation to explain the expansion of government.

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    Bibliographic Info

    Article provided by College of Business, Feng Chia University, Taiwan in its journal Journal of Economics and Management.

    Volume (Year): 2 (2006)
    Issue (Month): 1 (January)
    Pages: 1-20

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    Handle: RePEc:jec:journl:v:2:y:2006:i:1:p:1-20

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    Related research

    Keywords: tax evasion; political economy; government size; median;

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    References

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    1. Pencavel, John H., 1979. "A note on income tax evasion, labor supply, and nonlinear tax schedules," Journal of Public Economics, Elsevier, vol. 12(1), pages 115-124, August.
    2. Glen Ueng, K. L. & Yang, C. C., 2001. "Plea bargaining with the IRS: extensions and further results," Journal of Public Economics, Elsevier, vol. 81(1), pages 83-98, July.
    3. Persson, Torsten & Tabellini, Guido, 2002. "Political economics and public finance," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 24, pages 1549-1659 Elsevier.
    4. Browning, Edgar K & Johnson, William R, 1984. "The Trade-Off between Equality and Efficiency," Journal of Political Economy, University of Chicago Press, vol. 92(2), pages 175-203, April.
    5. Meltzer, Allan H & Richard, Scott F, 1981. "A Rational Theory of the Size of Government," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 914-27, October.
    6. Lin, Wen-Zhung & Yang, C. C., 2001. "A dynamic portfolio choice model of tax evasion: Comparative statics of tax rates and its implication for economic growth," Journal of Economic Dynamics and Control, Elsevier, vol. 25(11), pages 1827-1840, November.
    7. repec:att:wimass:9610 is not listed on IDEAS
    8. Watson, Harry, 1985. "Tax evasion and labor markets," Journal of Public Economics, Elsevier, vol. 27(2), pages 231-246, July.
    9. James Andreoni & Brian Erard & Jonathan Feinstein, 1998. "Tax Compliance," Journal of Economic Literature, American Economic Association, vol. 36(2), pages 818-860, June.
    10. Gans, Joshua S. & Smart, Michael, 1996. "Majority voting with single-crossing preferences," Journal of Public Economics, Elsevier, vol. 59(2), pages 219-237, February.
    11. Tanzi,Vito & Schuknecht,Ludger, 2000. "Public Spending in the 20th Century," Cambridge Books, Cambridge University Press, number 9780521664103, October.
    12. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 323-338, November.
    13. Peltzman, Sam, 1980. "The Growth of Government," Journal of Law and Economics, University of Chicago Press, vol. 23(2), pages 209-87, October.
    14. Joel Slemrod & Shlomo Yitzhaki, 2000. "Tax Avoidance, Evasion, and Administration," NBER Working Papers 7473, National Bureau of Economic Research, Inc.
    15. Macho-Stadler, Ines & Perez-Castrillo, J David, 1997. "Optimal Auditing with Heterogeneous Income," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(4), pages 951-68, November.
    16. Romer, Thomas, 1975. "Individual welfare, majority voting, and the properties of a linear income tax," Journal of Public Economics, Elsevier, vol. 4(2), pages 163-185, February.
    17. Itsumi, Yoshitaka, 1974. "Distributional Effects of Linear Income Tax Schedules," Review of Economic Studies, Wiley Blackwell, vol. 41(3), pages 371-81, July.
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