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Tax Evasion, Tax Rates, and Reference Dependence

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  • Michele Bernasconi
  • Alberto Zanardi

Abstract

Using cumulative prospect theory as a notable example of reference-dependent preference, we revisit the basic portfolio model of tax evasion. We show that some controversial implications of the standard expected-utility theory, including that of a negative relationship between tax rates and evaded income, can be corrected in a direction more consistent with intuition and empirical evidence.

Suggested Citation

  • Michele Bernasconi & Alberto Zanardi, 2004. "Tax Evasion, Tax Rates, and Reference Dependence," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 60(3), pages 422-445, September.
  • Handle: RePEc:mhr:finarc:urn:sici:0015-2218(200409)60:3_422:tetrar_2.0.tx_2-w
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    More about this item

    Keywords

    tax evasion; reference income; prospect theory;

    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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