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Tax Evasion and Relative Tax Contribution

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  • Judith Panadés

Abstract

This article analyzes the relationship between tax rate levels and tax evasion in a context where the utility of a taxpayer depends on both his or her own consumption and relative position with respect to the average declared income of the economy. In this framework, if the taxpayer declares an amount of his or her income greater (smaller) than the average of the economy, that person’s utility will decrease (increase). The author shows that, if the externality from the others’ declared income is taken into account, several equilibria arise in the economy. Then, an increase in the tax rate leads to a larger amount of unreported income at the equilibrium displaying the lowest income reports. This comparative statics result agrees with most of the existing empirical evidence.

Suggested Citation

  • Judith Panadés, 2004. "Tax Evasion and Relative Tax Contribution," Public Finance Review, , vol. 32(2), pages 183-195, March.
  • Handle: RePEc:sae:pubfin:v:32:y:2004:i:2:p:183-195
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    Cited by:

    1. Goerke, Laszlo, 2013. "Relative consumption and tax evasion," Journal of Economic Behavior & Organization, Elsevier, vol. 87(C), pages 52-65.
    2. Jordi Caballé & Judith Panadés, 2007. "Tax Rates, Tax Evasion, and Growth in a Multi-period Economy," Hacienda Pública Española, IEF, vol. 183(4), pages 67-80, december.
    3. Syed Hassan Raza & Syed Muddassir Abbas Naqvi, 2016. "Impact of Tax Evasion on Total Tax in Pakistan," International Journal of Academic Research in Business and Social Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Business and Social Sciences, vol. 6(11), pages 730-739, November.

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