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Relative Consumption and Tax Evasion

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  • Laszlo Goerke

    ()
    (Institute for Labour Law and Industrial Relations in the EU, University of Trier)

Abstract

Relative consumption effects or status concerns that feature jealousy (in the sense of Dupor and Liu, AER 2003) boost consumption expenditure. If consumption is financed by labour income, such status considerations increase labour supply and, hence, the tax base. A higher taxable income, in turn, can make tax evasion more attractive. We show for various specifications of preferences that the tax base effect generally dominates. Consequently, relative consumption effects tend to reduce tax evasion. This is true, irrespective of whether tax parameters are exogenous, guarantee a balanced budget or are set optimally.

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Bibliographic Info

Paper provided by Institute of Labour Law and Industrial Relations in the European Union (IAAEU) in its series IAAEU Discussion Papers with number 201301.

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Date of creation: Jan 2013
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Handle: RePEc:iaa:dpaper:201301

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Keywords: Income taxes; Optimal taxation; Relative consumption; Tax evasion;

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Cited by:
  1. Alessandro Balestrino, 2012. "Taxes, Status Goods, and Piracy," CESifo Working Paper Series 3704, CESifo Group Munich.

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