Dynamic Tax Evasion with Habit Formation

26 Pages Posted: 21 Nov 2016

See all articles by Michele Bernasconi

Michele Bernasconi

Università Ca' Foscari, Venezia - Department of Economics and SSE

Rosella Levaggi

University of Brescia - Department of Economics and Management

Francesco Menoncin

University of Brescia - Department of Economics

Date Written: November 11, 2016

Abstract

Although tax evasion and auditing are dynamic processes, they have been approached in a dynamic framework only recently. We argue that the decision to avoid taxes is dynamically embedded with consumption decisions, which in turn are driven by consumption habits. The model is cast in a dynamic context with an infinite horizon. Our paper makes several contributions to the existing literature on tax evasion: 1) habit formation has a dampening effect on tax evasion; 2) as the representative consumer grows older, the gap between habit and consumption decreases and his tax evasion decreases; 3) the effect of an increase in tax evasion depends on the ration of habit to capital, i.e. the presence of the Yitzhaki (1974) paradox depends on such a ratio; 4) we show that in the long run the ratio increases while the relationship between evasion and the tax rate changes from being positive to being negative; 5) the model has policy implications: other things being equal, it is better to induce people to reduce their level of tax evasion with controls rather than fines.

Keywords: Dynamic Tax Evasion, Habit

JEL Classification: H26, H30

Suggested Citation

Bernasconi, Michele and Levaggi, Rosella and Menoncin, Francesco, Dynamic Tax Evasion with Habit Formation (November 11, 2016). University Ca' Foscari of Venice, Dept. of Economics Research Paper Series No. 31/WP/2016, Available at SSRN: https://ssrn.com/abstract=2872759

Michele Bernasconi

Università Ca' Foscari, Venezia - Department of Economics and SSE ( email )

Dorsoduro 3246
Venice, Veneto 30123
Italy

Rosella Levaggi (Contact Author)

University of Brescia - Department of Economics and Management ( email )

Via San Faustino 74B
Brescia, 25122
Italy
+39 03 0298 8825 (Phone)
+39 03 0298 8837 (Fax)

HOME PAGE: http://www.eco.unibs.it/segdse/rlev/index.htm

Francesco Menoncin

University of Brescia - Department of Economics ( email )

Via San Faustino 74B
Brescia, 25122
Italy
0039-0302988806 (Phone)
0039-0302988837 (Fax)

HOME PAGE: http://www.eco.unibs.it/~menoncin/

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