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Corruption and Tax Evasion: Reflections on Greek Tragedy

Listed author(s):
  • Anastasia Litina

    (University of Luxembourg)

  • Theodore Palivos

    ()

    (Athens University of Economics and Business)

We provide empirical support and a theoretical explanation for the vicious circle of political corruption and tax evasion in which countries often fall into. We address this issue in the context of a model with two distinct groups of agents: citizens and politicians. Citizens decide the fraction of their income for which they evade taxes. Politicians decide the fraction of the public budget that they peculate. We show that multiple self-fulfilling equilibria with different levels of corruption can emerge based on the existence of strategic complementarities, indicating that “corruption” may corrupt. Furthermore, we find that standard deterrence policies cannot eliminate the multiplicity of equilibria. Instead, policies that impose a strong moral cost on tax evaders and corrupt politicians can lead to a unique equilibrium.

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File URL: http://www.bankofgreece.gr/BogEkdoseis/Paper2015193.pdf
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Paper provided by Bank of Greece in its series Working Papers with number 193.

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Length: 47
Date of creation: Jun 2015
Handle: RePEc:bog:wpaper:193
Contact details of provider: Web page: http://www.bankofgreece.gr

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