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

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Author Info
Alessandro Balestrino (University of Pisa)

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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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Publisher 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
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Date of revision: Dec 2005
Handle: RePEc:kud:epruwp:05-15

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  1. Alessandro Balestrino & Umberto Galmarini, 2003. "Imperfect Tax Compliance and the Optimal Provision of Public Goods," Bulletin of Economic Research, Blackwell Publishing, vol. 55(1), pages 37-52, January. [Downloadable!] (restricted)
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  3. 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. [Downloadable!] (restricted)
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  5. George A. Akerlof & Rachel E. Kranton, 2005. "Identity and the Economics of Organizations," Journal of Economic Perspectives, American Economic Association, vol. 19(1), pages 9-32, Winter. [Downloadable!] (restricted)
  6. 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. [Downloadable!] (restricted)
  7. Fehr, Ernst & Falk, Armin, 2002. "Psychological Foundations of Incentives," IZA Discussion Papers 507, Institute for the Study of Labor (IZA). [Downloadable!]
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  8. Boskin, Michael J & Sheshinski, Eytan, 1978. "Optimal Redistributive Taxation when Individual Welfare Depends upon Relative Income," The Quarterly Journal of Economics, MIT Press, vol. 92(4), pages 589-601, November. [Downloadable!] (restricted)
  9. Simon Johnson & Daniel Kaufman & Andrei Shleifer, 1997. "The Unofficial Economy in Transition," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1997-2), pages 159-240. [Downloadable!]
  10. Dan Anderberg & Alessandro Balestrino & Umberto Galmarini, 2003. "Search and Taxation in a Model of Underground Economic Activities," Economic Inquiry, Oxford University Press, vol. 41(4), pages 647-659, October. [Downloadable!] (restricted)
  11. 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. [Downloadable!] (restricted)
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  13. Cowell, F A, 1990. "Tax Sheltering and the Cost of Evasion," Oxford Economic Papers, Oxford University Press, vol. 42(1), pages 231-43, January. [Downloadable!] (restricted)
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  17. Gans, Joshua S. & Smart, Michael, 1996. "Majority voting with single-crossing preferences," Journal of Public Economics, Elsevier, vol. 59(2), pages 219-237, February. [Downloadable!] (restricted)
  18. Lindbeck, Assar & Persson, Mats, 2006. "A Model of Income Insurance and Social Norms," Seminar Papers 742, Stockholm University, Institute for International Economic Studies. [Downloadable!]
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  19. Joel Slemrod, 1998. "A General Model of the Behavioral Response to Taxation," NBER Working Papers 6582, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  20. Cullis, John G. & Lewis, Alan, 1997. "Why people pay taxes: From a conventional economic model to a model of social convention," Journal of Economic Psychology, Elsevier, vol. 18(2-3), pages 305-321, April. [Downloadable!] (restricted)
  21. Ireland, N. J., 2001. "Optimal income tax in the presence of status effects," Journal of Public Economics, Elsevier, vol. 81(2), pages 193-212, August. [Downloadable!] (restricted)
  22. George A. Akerlof & Rachel E. Kranton, 2000. "Economics And Identity," The Quarterly Journal of Economics, MIT Press, vol. 115(3), pages 715-753, August. [Downloadable!] (restricted)
  23. Wenzel, Michael, 2004. "An analysis of norm processes in tax compliance," Journal of Economic Psychology, Elsevier, vol. 25(2), pages 213-228, April. [Downloadable!] (restricted)
  24. Dufwenberg, Martin & Lundholm, Michael, 2001. "Social Norms and Moral Hazard," Economic Journal, Royal Economic Society, vol. 111(473), pages 506-25, July. [Downloadable!] (restricted)
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  25. repec:cup:cbooks:9780521891073 is not listed on IDEAS
  26. Ferrer-i-Carbonell, Ada, 2005. "Income and well-being: an empirical analysis of the comparison income effect," Journal of Public Economics, Elsevier, vol. 89(5-6), pages 997-1019, June. [Downloadable!] (restricted)
  27. Kopczuk, Wojciech, 2005. "Tax bases, tax rates and the elasticity of reported income," Journal of Public Economics, Elsevier, vol. 89(11-12), pages 2093-2119, December. [Downloadable!] (restricted)
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  28. 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. [Downloadable!] (restricted)
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  29. Lars P. Feld & Bruno S. Frey, 2006. "Tax Compliance as the Result of a Psychological Tax Contract: The Role of Incentives and Responsive Regulation," CREMA Working Paper Series 2006-10, Center for Research in Economics, Management and the Arts (CREMA). [Downloadable!]
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  30. Friedman, Eric & Johnson, Simon & Kaufmann, Daniel & Zoido-Lobaton, Pablo, 2000. "Dodging the grabbing hand: the determinants of unofficial activity in 69 countries," Journal of Public Economics, Elsevier, vol. 76(3), pages 459-493, June. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Alessandro Balestrino, 2007. "It is a Theft but not a Crime," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  2. Micheletto, Luca, 2009. "Optimal nonlinear redistributive taxation and public good provision in an economy with Veblen effects," Working Paper Series 2009:3, Uppsala University, Department of Economics. [Downloadable!]
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