Tax Avoidance, Endogenous Social Norms, and the Comparison Income Effect
31 Pages Posted: 25 Jul 2006
Date Written: July 2006
Abstract
We present a model of income tax avoidance with heterogeneous agents, assuming the presence of a comparison income effect and of a psychic cost (disutility) of tax dodging. We analyse the policy preferences of the agents, and identify a median-voter political equilibrium. Paralleling previous results in the optimal taxation literature, we show that the comparison income effect calls for a high degree of progressivity of the income tax; additionally, we find that this tendency is strengthened by the psychic cost of avoidance. We then model the endogenous formation of the stigma attached to the act of avoidance as a "conformism game". We argue that such stigma is motivated by the desire to make redistribution more effective, and that it is enhanced by the income comparison effect.
Keywords: tax avoidance, social norms, conformism, comparison income, median voter
JEL Classification: D72, H26, H31
Suggested Citation: Suggested Citation
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