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Corruption and Tax Evasion: Reflections on Greek Tragedy

Anastasia Litina () and Theodore Palivos

No 193, Working Papers from Bank of Greece

Abstract: We provide empirical support and a theoretical explanation for the vicious circle of political corruption and tax evasion in which countries often fall into. We address this issue in the context of a model with two distinct groups of agents: citizens and politicians. Citizens decide the fraction of their income for which they evade taxes. Politicians decide the fraction of the public budget that they peculate. We show that multiple self-fulfilling equilibria with different levels of corruption can emerge based on the existence of strategic complementarities, indicating that “corruption” may corrupt. Furthermore, we find that standard deterrence policies cannot eliminate the multiplicity of equilibria. Instead, policies that impose a strong moral cost on tax evaders and corrupt politicians can lead to a unique equilibrium.

Keywords: Corruption; Tax Evasion; Multiple Equilibria; Social Stigma (search for similar items in EconPapers)
JEL-codes: D73 E62 H26 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-iue, nep-mac, nep-pbe, nep-pol, nep-pub and nep-soc
Date: 2015-06
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