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Tax Evasion: Does the Tax Burden Matter?

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  • Michele Bernasconi, Luca Corazzini, Raffaello Seri
Abstract
We study the effects of the tax burden on tax evasion both theoretically and experimentally. We develop a model of tax evasion decision that is based on two ideas from behavioral economics: 1) taxpayers are endowed with reference dependent preferences that are subject to hedonic adaptation; and 2) in making their choices, taxpayers are affected by ethical concerns. The model generates new predictions about the effects of a change in the tax rate on the decision to evade taxes. Contrary to the classical expected utility model, but consistently with previous applications of reference dependent preferences to taxpayers’ decisions, an increase in the tax rate increases tax evasion. However, the converse is not true. Moreover, as taxpayers adapt to the new legal tax rate, the decision to evade taxes becomes independent from the tax rate. We present results from a laboratory experiment that support the main predictions of the model.

Suggested Citation

  • Michele Bernasconi, Luca Corazzini, Raffaello Seri, 2012. "Tax Evasion: Does the Tax Burden Matter?," ISLA Working Papers 43, ISLA, Centre for research on Latin American Studies and Transition Economies, Universita' Bocconi, Milano, Italy.
    • Handle: RePEc:slp:islawp:islawp43
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    References listed on IDEAS

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    2. Radu Claudia Florina & Dumiter Florin Cornel & Dudas Lavinia & Jimon Stefania Master, 2017. "Study On Budget Revenue Collection, Shadow Economy and Tax Losses Caused By It," Studia Universitatis „Vasile Goldis” Arad – Economics Series, Sciendo, vol. 27(2), pages 1-18, June.
    3. Pickhardt, Michael & Prinz, Aloys, 2014. "Behavioral dynamics of tax evasion – A survey," Journal of Economic Psychology, Elsevier, vol. 40(C), pages 1-19.

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    More about this item

    Keywords

    Tax Evasion; Prospect Theory; Adaptation;
    All these keywords.

    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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