Solving the Yitzhaki Paradox
AbstractThis paper examines the determinants of tax evasion under prospect theory. For prospect theory, reference dependence is a fundamental element (the utility function depends on gains and losses relative to a reference point and not on final wealths as in expected utility theory). In order to identify the determinants of the income tax evasion decision, a general reference income is used. We show that results obtained under expected utility theory are not robust. In particular, tax evasion is increasing in the tax rate as soon as a suitable relative risk aversion measure is larger with auditing, than without. With this simple and testable condition, prospect theory provides a general framework consistent with empirical evidence for the tax evasion behaviour problem.
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Bibliographic InfoPaper provided by Aix-Marseille School of Economics, Marseille, France in its series AMSE Working Papers with number 1238.
Length: 21 pages
Date of creation: 03 Sep 2012
Date of revision:
Tax evasion; Prospect theory; Reference dependence; Decision weights.;
Find related papers by JEL classification:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion
- K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-01-07 (All new papers)
- NEP-IUE-2013-01-07 (Informal & Underground Economics)
- NEP-PBE-2013-01-07 (Public Economics)
- NEP-PUB-2013-01-07 (Public Finance)
- NEP-UPT-2013-01-07 (Utility Models & Prospect Theory)
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