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The cutoff policy of taxation when CRRA taxpayers differ in risk aversion coefficients and income: a proof

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  • Privileggi, Fabio

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Abstract

Under a cutoff policy, taxpayers can either report income as usual and run the risk of being audited, or report a "cutoff" income and hence pay a threshold tax that guarantees not being audited. Whereas the mainstream literature in this field assumes risk neutrality of taxpayers - with some notable exceptions like Chu (1990) and Glen Ueng and Yang (2001) - this paper assumes risk aversion instead: taxpayers have a Constant Relative Risk Aversion (CRRA) utility function and differ in terms of their relative risk aversion coefficient and income. The novel contribution of this work is that, under certain conditions, the cutoff is accepted by taxpayers with intermediate characteristics in terms of income and relative risk aversion. Contrary to the standard result in the literature, a full separation of types (the rich who accept the cutoff versus the poor who refuse it) does not arise. However, our results confirm that the cutoff policy violates equity, as only some taxpayers directly benefit. Nonetheless, the perception of this drawback may in practice be obfuscated because that exclusion does not necessarily affect only the poor.

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Bibliographic Info

Paper provided by Institute of Public Policy and Public Choice - POLIS in its series POLIS Working Papers with number 99.

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Length: 30 pages
Date of creation: Dec 2007
Date of revision:
Handle: RePEc:uca:ucapdv:99

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Web page: http://polis.unipmn.it

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Keywords: cutoff; tax evasion; relative risk aversion.;

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Cited by:
  1. Stefania Ottone & Ferruccio Ponzano, 2011. "How people perceive the Welfare State: a real-effort experiment," International Review of Economics, Springer, vol. 58(2), pages 165-183, June.
  2. Cavaleri, Pietro & Keren, Michael & Ramello, Giovanni B. & Valli, Vittorio, 2009. "Publishing an E-journal on a shoe string: Is it a sustainaible project?," POLIS Working Papers 118, Institute of Public Policy and Public Choice - POLIS.
  3. Acemoglu, Daron & Ticchi, Davide & Vindigni, Andrea, 2008. "A theory of military dictatorships," POLIS Working Papers 100, Institute of Public Policy and Public Choice - POLIS.
  4. Marchese, Carla, 2008. "The limits to growth then and now," POLIS Working Papers 105, Institute of Public Policy and Public Choice - POLIS.

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