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Relative Consumption and Tax Evasion

  • Laszlo Goerke

Relative consumption effects or status concerns that feature jealousy (in the sense of Dupor and Liu, AER 2003) boost consumption expenditure. If consumption is financed by labour income, such status considerations increase labour supply and, hence, the tax base. A higher taxable income, in turn, can make tax evasion more attractive. We show for various specifications of preferences that the tax base effect generally dominates. Consequently, relative consumption effects tend to reduce tax evasion. This is true, irrespective of whether tax parameters are exogenous, guarantee a balanced budget or are set optimally.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4077.

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Date of creation: 2013
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Handle: RePEc:ces:ceswps:_4077
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