Explicating Corruption and Tax Evasion:Reflections on Greek Tragedy
Do developed countries experience extensive corruption and if so how should they treat it? Evidence from countries in which tax evasion and various forms of corruption coexist and interact (e.g. Greece) indicates that the answer is positive. We address this problem by constructing an overlapping generations model com- prising two distinct groups of agents, citizens and politicians. Citizens decide the fraction of their income that they report to the tax authorities. Politicians decide the fraction of the public budget that they peculate. In such a context, multiple self-ful?lling equilibria can emerge: a "good"("bad") equilibrium with low (high) corruption and high (low) level of spending on education. It is shown that standard deterrence policies (e.g., fines) cannot eliminate multiplicity. Interestingly, whenever corruption may corrupt, policies that impose a strong moral cost on tax evaders and corrupt politicians can lead to a unique equilibrium.
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