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Corruption, Tax Evasion and Social Values

Listed author(s):
  • Anastasia Litina

    ()

    (CREA, Université du 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 speculate. 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 elimi- nate multiplicity. Instead, we find that impose a strong moral cost on tax evaders and corrupt politicians can lead to a unique equilibirum.

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Paper provided by Center for Research in Economic Analysis, University of Luxembourg in its series CREA Discussion Paper Series with number 14-10.

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Date of creation: 2014
Handle: RePEc:luc:wpaper:14-10
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