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Collaborative tax evasion and social norms: why deterrence does not work

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  • Juin-jen Chang
  • Ching-chong Lai

Abstract

This paper makes a preliminary attempt to model a phenomenon of collaborative tax evasion between a seller and his customer and incorporates the social norm into such collusive tax-evading activities. It is found that, due to the existence of the social norm, more prevalent collaborative tax evasion at the status quo tends to intensify the extent of the tax evasion itself; this thus furnishes a self-fulfilling equilibrium and it may also give rise to multiple equilibria. More importantly, we find that the snowballing effect stemming from social norm has a decisive influence not only in determining the conformity of consumers to the tax code, but also the deterrent effect of the authority's tax enforcement. If collaborative tax evasion is initially rampant, raising fines for tax evasion will give rise to a strong venal effect that will increase tax evasion. Once this perverse effect outweighs the usual deterrent effect associated with raising fines for tax evasion, a more severe fine may result in higher rather than lower tax evasion. Copyright 2004, Oxford University Press.

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Bibliographic Info

Article provided by Oxford University Press in its journal Oxford Economic Papers.

Volume (Year): 56 (2004)
Issue (Month): 2 (April)
Pages: 344-368

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Handle: RePEc:oup:oxecpp:v:56:y:2004:i:2:p:344-368

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Cited by:
  1. James Alm & Jorge Martinez-Vazquez, 2007. "Tax Morale and Tax Evasion in Latin American Countries," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0732, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  2. Giovanni Immordino & Francesco Flaviano Russo, 2014. "Taxing Cash to Fight Collaborative Tax Evasion?," CSEF Working Papers 351, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  3. Bouwe Dijkstra, . "Good And Bad Equilibria With The Informal Sector," Discussion Papers 06/01, University of Nottingham, School of Economics.
  4. Loukas Balafoutas & Adrian Beck & Rudolf Kerschbamer & Matthias Sutter, 2014. "The Hidden Costs of Tax Evasion - Collaborative Tax Evasion in Markets for Expert Services," Working Papers 2014-01, Faculty of Economics and Statistics, University of Innsbruck.
  5. Marcelo Arbex & Enlinson Mattos, 2013. "Optimal Sales Tax Rebates and Tax Enforcement Consumers," Working Papers 1302, University of Windsor, Department of Economics.
  6. James, Simon & Edwards, Alison, 2010. "An annotated bibliography of tax compliance and tax compliance costs," MPRA Paper 26106, University Library of Munich, Germany.
  7. Arbex, Marcelo & Mattos, Enlinson & Ogura, Laudo M., 2014. "Taxing hard-to-tax markets," Textos para discussão 355, Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil).
  8. Guibourg, Gabriela & Segendorf, Björn, 2007. "The Use of Cash and the Size of the Shadow Economy in Sweden," Working Paper Series 204, Sveriges Riksbank (Central Bank of Sweden).
  9. Traxler, Christian, 2006. "Voting over Taxes: The Case of Tax Evasion," Discussion Papers in Economics 1188, University of Munich, Department of Economics.
  10. James, Simon & Edwards, Alison, 2008. "Developing Tax Policy in a Complex and Changing World," Economic Analysis and Policy (EAP), Queensland University of Technology (QUT), School of Economics and Finance, vol. 38(1), pages 35-53, March.
  11. James Alm & Jorge Martinez-Vazquez, 2007. "Tax Morale and Tax Evasion in Latin America," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0704, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.

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