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 Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7760.
Length: 24 pages
Date of creation: Nov 2013
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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.
- Amedeo Piolatto & Matthew D. Rablen, 2014. "Prospect theory and tax evasion: a reconsideration of the Yitzhaki puzzle," Working Papers 2014/3, Institut d'Economia de Barcelona (IEB).
- 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-ALL-2013-12-06 (All new papers)
- NEP-IUE-2013-12-06 (Informal & Underground Economics)
- NEP-PBE-2013-12-06 (Public Economics)
- NEP-PUB-2013-12-06 (Public Finance)
- NEP-UPT-2013-12-06 (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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