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Inequality, Tax Avoidance, and Financial Instability

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  • Landier, Augustin
  • Plantin, Guillaume

Abstract

We model the link between inequality and excessive risk taking. In the presence of increasing returns to tax avoidance, the middle class is willing to take non rewarded financial risk despite risk aversion. Electoral pressure may lead an incumbent politician to endorse this excessive risk taking if the right tail of wealth distribution is sufficiently fat. By increasing the scope for tax avoidance, globalization of capital and human capital markets might have increased financial fragility.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8391.

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Date of creation: May 2011
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Handle: RePEc:cpr:ceprdp:8391

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Keywords: financial instability; tax avoidance;

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  1. Henrik Jacobsen Kleven & Camille Landais & Emmanuel Saez, 2013. "Taxation and International Migration of Superstars: Evidence from the European Football Market," American Economic Review, American Economic Association, vol. 103(5), pages 1892-1924, August.
  2. Romain Ranciere & Michael Kumhof, 2011. "Inequality, Leverage and Crises," 2011 Meeting Papers 1374, Society for Economic Dynamics.
  3. Steven J. Davis & James A. Kahn, 2008. "Interpreting the Great Moderation: changes in the volatility of economic activity at the macro and micro Levels," Staff Reports 334, Federal Reserve Bank of New York.
  4. Martin Feldstein, 1995. "Tax Avoidance and the Deadweight Loss of the Income Tax," NBER Working Papers 5055, National Bureau of Economic Research, Inc.
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  6. Emannauel Farhi & Ivan Werning, 2006. "Capital Taxation," 2006 Meeting Papers 455, Society for Economic Dynamics.
  7. Christine A. Parlour & Guillaume Plantin, 2008. "Loan Sales and Relationship Banking," Journal of Finance, American Finance Association, vol. 63(3), pages 1291-1314, 06.
  8. Dirk Krueger & Fabrizio Perri, 2003. "On the Welfare Consequences of the Increase in Inequality in the United States," NBER Working Papers 9993, National Bureau of Economic Research, Inc.
  9. Kenneth Rogoff & Anne Sibert, 1986. "Elections and Macroeconomic Policy Cycles," NBER Working Papers 1838, National Bureau of Economic Research, Inc.
  10. Thomas Piketty & Emmanuel Saez, 2007. "How Progressive is the U.S. Federal Tax System? A Historical and International Perspective," Journal of Economic Perspectives, American Economic Association, vol. 21(1), pages 3-24, Winter.
  11. Borys Grochulski, 2007. "Optimal nonlinear income taxation with costly tax avoidance," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 77-109.
  12. Wolfers, Justin, 2002. "Are Voters Rational? Evidence from Gubernatorial Elections," Research Papers 1730, Stanford University, Graduate School of Business.
  13. repec:bla:restud:v:77:y:2010:i:3:p:841-881 is not listed on IDEAS
  14. Joel Slemrod, 2007. "Cheating Ourselves: The Economics of Tax Evasion," Journal of Economic Perspectives, American Economic Association, vol. 21(1), pages 25-48, Winter.
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