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

31 Pages Posted: 25 Jul 2006  

Alessandro Balestrino

Universita di Pisa - Dipartimento di Scienze Economiche; CESifo (Center for Economic Studies and Ifo Institute)

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

Balestrino, Alessandro, Tax Avoidance, Endogenous Social Norms, and the Comparison Income Effect (July 2006). CESifo Working Paper Series No. 1758. Available at SSRN: https://ssrn.com/abstract=920344

Alessandro Balestrino (Contact Author)

Universita di Pisa - Dipartimento di Scienze Economiche ( email )

Sede di Scienze Politiche, via Serafini 3
I-56126 Pisa
Italy
+39 050 221 2437 (Phone)
+39 050 221 2450 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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