Why Do People Pay Taxes? An Explanation Based On Loss Aversion And Overweighting of Low Probabilities

This file is part of IDEAS, which uses RePEc data

Why Do People Pay Taxes? An Explanation Based On Loss Aversion And Overweighting of Low Probabilities

Author Info

Sanjit Dhami
Ali al-Nowaihi ()

Additional information is available for the following registered author(s):

Sanjit Dhami

Abstract

Given actual probabilities of audit and penalty rates observed in the real world, tax evasion should be an extremely attractive gamble to an expected utility maximizer. However, in practice, one observes too much compliance relative to the predictions of expected utility. This paper considers an alternative theoretical model that is based on Kahneman and Tversky's cumulative prospect theory. The model predicts empirically plausible magnitudes of tax evasion despite low audit probabilities and penalty rates. An increase in the tax rate leads to an increase in the amount evaded- a result, which is both, intuitive, and factual, but is contrary to the prediction made by expected utility theory. Furthermore, the optimal tax rates predicted by prospect theory, in the presence of tax evasion behaviour, are consistent with actual tax rates.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

Publisher Info
Paper provided by Department of Economics, University of Leicester in its series Discussion Papers in Economics with number 03/18.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length:
Date of creation: Dec 2003
Date of revision:
Handle: RePEc:lec:leecon:03/18

Contact details of provider:
Postal: Department of Economics University of Leicester, University Road. Leicester. LE1 7RH. UK
Phone: +44 (0)116 252 2887
Fax: +44 (0)116 252 2908
Email:
Web page: http://www.le.ac.uk/economics/

Order Information:
Email:
Web: http://www.le.ac.uk/economics/research/dpseries.html

For technical questions regarding this item, or to correct its listing, contact: (Mrs. Alexandra Mazzuoccolo).

Find related papers by JEL classification:
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion
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-2004-02-01 (All new papers)
NEP-LAB-2004-02-01 (Labour Economics)
NEP-LAW-2004-02-01 (Law & Economics)
NEP-MIC-2004-02-01 (Microeconomics)
NEP-PBE-2004-02-01 (Public Economics)
NEP-PUB-2004-02-01 (Public Finance)

Statistics

Access and download statistics

Did you know? To receive notification of recent additions to the database, subscribe to the free NEP reports.

This page was last updated on 2009-11-20.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.