Relative Consumption and Tax Evasion

Laszlo Goerke

No 201301, IAAEU Discussion Papers from Institute of Labour Law and Industrial Relations in the European Union (IAAEU)

Abstract: Relative consumption effects or status concerns that feature jealousy (in the sense of Dupor and Liu, AER 2003) boost consumption expenditure. If consumption is financed by labour income, such status considerations increase labour supply and, hence, the tax base. A higher taxable income, in turn, can make tax evasion more attractive. We show for various specifications of preferences that the tax base effect generally dominates. Consequently, relative consumption effects tend to reduce tax evasion. This is true, irrespective of whether tax parameters are exogenous, guarantee a balanced budget or are set optimally.

Keywords: Income taxes; Optimal taxation; Relative consumption; Tax evasion (search for similar items in EconPapers)
JEL-codes: D62 H21 H23 H24 H26 (search for similar items in EconPapers)
Date: 2013-01
New Economics Papers: this item is included in nep-iue and nep-pbe
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Citations: View citations in EconPapers (18)

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Journal Article: Relative consumption and tax evasion (2013)
Working Paper: Relative Consumption and Tax Evasion (2013)
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