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Tax Avoidance, Endogenous Social Norms, and the Comparison Income Effect

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  • Alessandro Balestrino

    (University of Pisa)

Abstract

We present a model of income tax avoidance with heterogenous agents, assuming the presence of a comparison income effect and of a psychic cost (disutility) of tax dodging. We analyse the policy preferences of the agents, and identify a median-voter political equilibrium. Paralleling previous results in the optimal taxation literature, we show that the comparison income effect calls for a high degree of progressivity of the income tax; additionally, we find that this tendence is strenghtened by the psychic cost of avoidance. We then investigate the source of the stigma attached to the act of avoidance and find that such stigma is motivated by the desire to make redistribution more effective, and that it is enhanced by the income comparison effect.

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Bibliographic Info

Paper provided by Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics in its series EPRU Working Paper Series with number 05-15.

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Length: 16 pages
Date of creation:
Date of revision: Dec 2005
Handle: RePEc:kud:epruwp:05-15

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References

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  1. Lindbeck, Assar & Nyberg, Sten & Weibull, Jörgen W., 1997. "Social Norms and Economic Incentives in the Welfare State," Working Paper Series 476, Research Institute of Industrial Economics.
  2. Lindbeck, Assar & Persson, Mats, 2006. "A Model of Income Insurance and Social Norms," Working Paper Series 659, Research Institute of Industrial Economics.
  3. Joel Slemrod, 2001. "A General Model of the Behavioral Response to Taxation," International Tax and Public Finance, Springer, vol. 8(2), pages 119-128, March.
  4. Cowell, F A, 1990. "Tax Sheltering and the Cost of Evasion," Oxford Economic Papers, Oxford University Press, vol. 42(1), pages 231-43, January.
  5. Lemieux, Thomas & Fortin, Bernard & Frechette, Pierre, 1994. "The Effect of Taxes on Labor Supply in the Underground Economy," American Economic Review, American Economic Association, vol. 84(1), pages 231-54, March.
  6. Akerlof, George A, 1980. "A Theory of Social Custom, of Which Unemployment May be One Consequence," The Quarterly Journal of Economics, MIT Press, vol. 94(4), pages 749-75, June.
  7. Johnson, Simon & Kaufmann, Daniel & Zoido-Lobaton, Pablo, 1998. "Regulatory Discretion and the Unofficial Economy," American Economic Review, American Economic Association, vol. 88(2), pages 387-92, May.
  8. Ernst Fehr & Armin Falk, . "Psychological Foundations of Incentives," IEW - Working Papers 095, Institute for Empirical Research in Economics - University of Zurich.
  9. Orviska, Marta & Hudson, John, 2003. "Tax evasion, civic duty and the law abiding citizen," European Journal of Political Economy, Elsevier, vol. 19(1), pages 83-102, March.
  10. Grandmont, Jean-Michel, 1978. "Intermediate Preferences and the Majority Rule," Econometrica, Econometric Society, vol. 46(2), pages 317-30, March.
  11. Gans, Joshua S. & Smart, Michael, 1996. "Majority voting with single-crossing preferences," Journal of Public Economics, Elsevier, vol. 59(2), pages 219-237, February.
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Cited by:
  1. Heijdra, B.J. & Ligthart, J.E., 2006. "Fiscal Policy, Monopolistic Competition and Finite Lives," Open Access publications from Tilburg University urn:nbn:nl:ui:12-199395, Tilburg University.
  2. Laszlo Goerke, 2013. "Relative Consumption and Tax Evasion," IAAEU Discussion Papers 201301, Institute of Labour Law and Industrial Relations in the European Union (IAAEU).
  3. Aleksandar Vasilev, 2013. "Fiscal policy in a Real-Business-Cycle model with labor-intensive government services and endogenous public sector wages and hours," Working Papers 2013_18, Business School - Economics, University of Glasgow.
  4. Alessandro Balestrino, 2012. "Taxes, Status Goods, and Piracy," CESifo Working Paper Series 3704, CESifo Group Munich.
  5. Micheletto, Luca, 2009. "Optimal nonlinear redistributive taxation and public good provision in an economy with Veblen effects," Working Paper Series, Center for Fiscal Studies 2009:2, Uppsala University, Department of Economics.
  6. Gebhard Kirchgässner, 2010. "Tax Morale, Tax Evasion, and the Shadow Economy," University of St. Gallen Department of Economics working paper series 2010 2010-17, Department of Economics, University of St. Gallen.

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