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Optimal tax enforcement under prospect theory

Author

Listed:
  • Gwenola Trotin

    (EQUIPPE)

  • Amedeo Piolatto

    (Universidad de Alicante)

Abstract

Prospect Theory (PT) has become the most credited alternative to Expected Utility Theory (EUT) as a theory of decision under uncertainty. This paper characterizes the optimal income tax and audit schemes under tax evasion, when taxpayers behave as predicted by PT. We show that the standard EUT results keep holding under PT, under even weaker conditions. Under fair assumptions on the reference income and on the utility function of taxpayers, we show that the optimal audit probability function is non-increasing and the optimal tax function is nondecreasing and concave.

Suggested Citation

  • Gwenola Trotin & Amedeo Piolatto, 2011. "Optimal tax enforcement under prospect theory," Working Papers. Serie AD 2011-24, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    • Handle: RePEc:ivi:wpasad:2011-24
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    Cited by:

    1. Amedeo Piolatto & Matthew D. Rablen, 2017. "Prospect theory and tax evasion: a reconsideration of the Yitzhaki puzzle," Theory and Decision, Springer, vol. 82(4), pages 543-565, April.
    2. Chiara Canta & Helmuth Cremer & Firouz Gahvari, 2024. "Welfare‐improving tax evasion," Scandinavian Journal of Economics, Wiley Blackwell, vol. 126(1), pages 98-126, January.
    3. Montalvo, José G. & Piolatto, Amedeo & Raya, Josep, 2020. "Transaction-tax evasion in the housing market," Regional Science and Urban Economics, Elsevier, vol. 81(C).
    4. Mittone, Luigi & Panebianco, Fabrizio & Santoro, Alessandro, 2017. "The bomb-crater effect of tax audits: Beyond the misperception of chance," Journal of Economic Psychology, Elsevier, vol. 61(C), pages 225-243.
    5. Remy Oddou, 2020. "The effect of a progressive taxation scheme on the endogenous formation of jurisdictions," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 22(5), pages 1705-1712, September.
    6. Domenico De Giovanni & Fabio Lamantia & Mario Pezzino, 2018. "Evolutionary Tax Evasion and Optimal Regulation," Economics Discussion Paper Series 1814, Economics, The University of Manchester.
    7. Giovanni, Domenico De & Lamantia, Fabio & Pezzino, Mario, 2019. "A behavioral model of evolutionary dynamics and optimal regulation of tax evasion," Structural Change and Economic Dynamics, Elsevier, vol. 50(C), pages 79-89.
    8. Mittone, Luigi & Panebianco, Fabrizio & Santoro, Alessandro, 2017. "The bomb-crater effect of tax audits: Beyond the misperception of chance," Journal of Economic Psychology, Elsevier, vol. 61(C), pages 225-243.

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    More about this item

    Keywords

    Tax evasion; Income tax enforcement; Prospect theory;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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