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Tax Evasion: Does the Tax Burden Matter?

  • Michele Bernasconi, Luca Corazzini, Raffaello Seri

We study the effects of the tax burden on tax evasion both theoretically and experimentally. We develop a model of tax evasion decision that is based on two ideas from behavioral economics: 1) taxpayers are endowed with reference dependent preferences that are subject to hedonic adaptation; and 2) in making their choices, taxpayers are affected by ethical concerns. The model generates new predictions about the effects of a change in the tax rate on the decision to evade taxes. Contrary to the classical expected utility model, but consistently with previous applications of reference dependent preferences to taxpayers’ decisions, an increase in the tax rate increases tax evasion. However, the converse is not true. Moreover, as taxpayers adapt to the new legal tax rate, the decision to evade taxes becomes independent from the tax rate. We present results from a laboratory experiment that support the main predictions of the model.

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Paper provided by ISLA, Centre for research on Latin American Studies and Transition Economies, Universita' Bocconi, Milano, Italy in its series ISLA Working Papers with number 43.

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Length: 26 pages
Date of creation: Jan 2012
Date of revision:
Handle: RePEc:slp:islawp:islawp43
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