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Inequality, Tax Avoidance, and Financial Instability

  • Landier, Augustin
  • Plantin, Guillaume

We model the link between inequality and excessive risk taking. In the presence of increasing returns to tax avoidance, the middle class is willing to take non rewarded financial risk despite risk aversion. Electoral pressure may lead an incumbent politician to endorse this excessive risk taking if the right tail of wealth distribution is sufficiently fat. By increasing the scope for tax avoidance, globalization of capital and human capital markets might have increased financial fragility.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8391.

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Date of creation: May 2011
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Handle: RePEc:cpr:ceprdp:8391
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  1. Thomas Piketty & Emmanuel Saez, 2007. "How Progressive is the U.S. Federal Tax System? A Historical and International Perspective," Journal of Economic Perspectives, American Economic Association, vol. 21(1), pages 3-24, Winter.
  2. Martin Feldstein, 1999. "Tax Avoidance And The Deadweight Loss Of The Income Tax," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 674-680, November.
  3. Borys Grochulski, 2007. "Optimal nonlinear income taxation with costly tax avoidance," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 77-109.
  4. Steven J. Davis & James A. Kahn, 2008. "Interpreting the Great Moderation: Changes in the Volatility of Economic Activity at the Macro and Micro Levels," Journal of Economic Perspectives, American Economic Association, vol. 22(4), pages 155-80, Fall.
  5. repec:bla:restud:v:77:y:2010:i:3:p:841-881 is not listed on IDEAS
  6. Christine A. Parlour & Guillaume Plantin, 2008. "Loan Sales and Relationship Banking," Journal of Finance, American Finance Association, vol. 63(3), pages 1291-1314, 06.
  7. Kleven, Henrik & Landais, Camille & Saez, Emmanuel, 2010. "Taxation and International Migration of Superstars: Evidence from the European Football Market," CEPR Discussion Papers 8134, C.E.P.R. Discussion Papers.
  8. Daron Acemoglu & Mikhail Golosov & Aleh Tsyvinski, 2010. "Dynamic Mirrlees Taxation under Political Economy Constraints," Review of Economic Studies, Oxford University Press, vol. 77(3), pages 841-881.
  9. Kumhof, Michael & Rancière, Romain, 2011. "Inequality, Leverage and Crises," CEPR Discussion Papers 8179, C.E.P.R. Discussion Papers.
  10. Rogoff, Kenneth & Sibert, Anne, 1988. "Elections and Macroeconomic Policy Cycles," Review of Economic Studies, Wiley Blackwell, vol. 55(1), pages 1-16, January.
  11. Dirk Krueger & Fabrizio Perri, 2004. "On the Welfare Consequences of the Increase in Inequality in the United States," NBER Chapters, in: NBER Macroeconomics Annual 2003, Volume 18, pages 83-138 National Bureau of Economic Research, Inc.
  12. Wolfers, Justin, 2002. "Are Voters Rational? Evidence from Gubernatorial Elections," Research Papers 1730, Stanford University, Graduate School of Business.
  13. Guillaume Plantin & Igor Makarov, 2010. "Rewarding Trading Skills Without Inducing Gambling," 2010 Meeting Papers 899, Society for Economic Dynamics.
  14. Emannauel Farhi & Ivan Werning, 2006. "Capital Taxation," 2006 Meeting Papers 455, Society for Economic Dynamics.
  15. Joel Slemrod, 2007. "Cheating Ourselves: The Economics of Tax Evasion," Journal of Economic Perspectives, American Economic Association, vol. 21(1), pages 25-48, Winter.
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