Tax Avoidance, Endogenous Social Norms, and the Comparison Income Effect

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.

Number of Pages in PDF File: 31

Keywords: tax avoidance, social norms, conformism, comparison income, median voter

JEL Classification: D72, H26, H31

working papers series