Prospect theory and tax evasion: a reconsideration of the Yitzhaki puzzle
AbstractThe standard expected utility model of tax evasion predicts that evasion is decreasing in the marginal tax rate (the Yitzhaki puzzle). The existing literature disagrees on whether prospect theory overturns the puzzle. We disentangle four distinct elements of prospect theory and find loss aversion and probability weighting to be redundant in respect of the puzzle. Prospect theory fails to reverse the puzzle for various classes of endogenous specification of the reference level. These classes include, as special cases, the most common specifications in the literature. New specifications of the reference level are needed, we conclude.
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Bibliographic InfoPaper provided by Institut d'Economia de Barcelona (IEB) in its series Working Papers with number 2014/3.
Length: 28 pages
Date of creation: 2014
Date of revision:
Prospect theory; tax evasion; Yitzhaki puzzle; stigma; diminishing sensitivity; reference dependence; endogenous audit probability; endogenous reference level;
Other versions of this item:
- Amadeo Piolatto & Matthew Rablen, 2013. "Prospect theory and tax evasion: a reconsideration of the Yitzhaki Puzzle," IFS Working Papers W13/25, Institute for Fiscal Studies.
- Piolatto, Amedeo & Rablen, Matthew D., 2013. "Prospect Theory and Tax Evasion: A Reconsideration of the Yitzhaki Puzzle," IZA Discussion Papers 7760, Institute for the Study of Labor (IZA).
- H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- 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-ACC-2014-03-30 (Accounting & Auditing)
- NEP-ALL-2014-03-30 (All new papers)
- NEP-CBE-2014-03-30 (Cognitive & Behavioural Economics)
- NEP-IUE-2014-03-30 (Informal & Underground Economics)
- NEP-LAW-2014-03-30 (Law & Economics)
- NEP-PBE-2014-03-30 (Public Economics)
- NEP-UPT-2014-03-30 (Utility Models & Prospect Theory)
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- Prospect theory and tax evasion: a reconsideration of the Yitzhaki Puzzl
by Alessandro Cerboni in Knowledge Team on 2013-09-21 16:08:21
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