Tax avoidance, endogenous social norms, and the comparison income effect

We analyse a model of income tax avoidance with heterogenous agents; we assume the presence of a comparison income e¤ect and of a psychic cost (disutility) of tax dodging. In this context, we show two sets of results. First, we study the policy preferences of the agents, and identify a median-agent political equilibrium. Paralleling previous ?ndings in the optimal taxation literature, we show that the comparison income e¤ect calls for a high degree of progressivity of the income tax; additionally, we ?nd that this tendence is strenghtened by the psychic cost of avoidance. Second, we model the endogenous formation of the stigma attached to the act of avoidance as a "conformism game", and propose a "modal-agent social equilibrium". We also argue that, in general, the stigma is motivated by the desire to make redistribution more e¤ective, as well as by the need to facilitate social competition.