Solving the Yitzhaki Paradox

Gwenola Trotin ()
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Gwenola Trotin: Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS

No 1238, AMSE Working Papers from Aix-Marseille School of Economics, France

Abstract: This paper examines the determinants of tax evasion under prospect theory. For prospect theory, reference dependence is a fundamental element (the utility function depends on gains and losses relative to a reference point and not on final wealths as in expected utility theory). In order to identify the determinants of the income tax evasion decision, a general reference income is used. We show that results obtained under expected utility theory are not robust. In particular, tax evasion is increasing in the tax rate as soon as a suitable relative risk aversion measure is larger with auditing, than without. With this simple and testable condition, prospect theory provides a general framework consistent with empirical evidence for the tax evasion behaviour problem.

Keywords: Tax evasion; Prospect theory; Reference dependence; Decision weights. (search for similar items in EconPapers)
JEL-codes: D81 H26 K42 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2012-09-03
New Economics Papers: this item is included in nep-iue, nep-pbe, nep-pub and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:aim:wpaimx:1238

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