Tax Evasion, Behavioral Microsimulation Models and Flat-Rate Tax Reforms. Analysis for Italy

34 Pages Posted: 24 Nov 2021 Last revised: 3 Jul 2022

See all articles by Andrea Albarea

Andrea Albarea

Ca Foscari University of Venice, Department of Economics, Students

Michele Bernasconi

Università Ca' Foscari Venezia - Department of Economics

Anna Marenzi

Ca Foscari University of Venice

Dino Rizzi

Ca Foscari University of Venice - Dipartimento di Economia

Date Written: November 24, 2021

Abstract

It is sometimes argued that a flat-rate tax reform can reduce tax noncompliance. The argument is, however, inconsistent with the so-called Yitzhaki’s puzzle of the classical expected utility (EU) model. The latter predicts an increase, rather than a reduction, in tax evasion following a cut in the tax rates resulting from a flat-rate reform. We study the impact of a flat-rate tax in a microsimulation tax-benefit model of Italy which allows us to analyse various hypotheses of tax evasion behavior. In addition to the EU model, we analyse expected utility with rank dependent probabilities (EURDP) and the model of reference dependent (RD) preference, the most favourable to overturn Yitzhaki’s puzzle. Our simulations show that a flat-rate tax would barely reduce overall evasion in Italy in all models considered. Redistributive effects are in all cases large.

Keywords: Fiscal reforms, tax evasion, reference dependent preferences

JEL Classification: H20, H26, H30

Suggested Citation

Albarea, Andrea and Bernasconi, Michele and Marenzi, Anna and Rizzi, Dino, Tax Evasion, Behavioral Microsimulation Models and Flat-Rate Tax Reforms. Analysis for Italy (November 24, 2021). Available at SSRN: https://ssrn.com/abstract=3970653 or http://dx.doi.org/10.2139/ssrn.3970653

Andrea Albarea

Ca Foscari University of Venice, Department of Economics, Students ( email )

Venice
Italy

Michele Bernasconi

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

Venice
Italy

Anna Marenzi

Ca Foscari University of Venice ( email )

Cannaregio 873
Venice, 30121
Italy

Dino Rizzi (Contact Author)

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

HOME PAGE: http://www.unive.it/persone/rizzid

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