Brains or Muscles? A Political Economy of Tax Evasion

45 Pages Posted: 8 Jun 2021 Last revised: 10 Jun 2021

See all articles by Arduino Tomasi

Arduino Tomasi

London School of Economics & Political Science (LSE) - Department of Government

Alberto Parmigiani

London School of Economics & Political Science (LSE), Department of Government, Students

Date Written: June 7, 2021

Abstract

An influential citizen wants to get away with tax evasion, a risky practice that can trigger audits resulting in sanctions. To reduce the chances of being audited, he can invest in the complexity of his evasion scheme —which we call "brains". The probability that an audit results in a sanction depends on the effort exerted by an investigator. To reduce the effort that she exerts, the citizen can commit to delivering punishments —which we call "muscles". We show that there exists a threshold in the quality of institutions below which muscles and brains are complements and above which they are substitutes. The citizen's equilibrium strategies yield a testable prediction: estimates of offshore tax evasion display an inverted U-shape along the quality of institutions. We provide evidence of this finding by building a panel dataset of estimated offshore wealth by individuals for 37 countries between 2002 to 2016.

Keywords: Taxation, Evasion, Influence

JEL Classification: C23, D72, H26

Suggested Citation

Tomasi, Arduino and Parmigiani, Alberto, Brains or Muscles? A Political Economy of Tax Evasion (June 7, 2021). Available at SSRN: https://ssrn.com/abstract=3861982

Arduino Tomasi (Contact Author)

London School of Economics & Political Science (LSE) - Department of Government ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

HOME PAGE: http://www.arduinotomasi.com

Alberto Parmigiani

London School of Economics & Political Science (LSE), Department of Government, Students ( email )

London
United Kingdom

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