Tax Morale, Entrepreneurship, and the Irregular Economy

Gaetano Lisi () and Maurizio Pugno ()

No 2011-01, Working Papers from Universita' di Cassino, Dipartimento di Scienze Economiche

Abstract: This paper incorporates tax morale into a search and matching model of equilibrium unemployment, with on-the-job search, extended to both the irregular sector and entrepreneurship. Tax morale is modelled as a social norm for tax compliance which renders evasion costly. The moral cost of tax evasion (the strength of the social norm) is negatively related to the fraction of entrepreneurs that evades taxes. Precisely, if the relationship is nonlinear, multiple equilibria may emerge, thus accounting for differences in-between regions and countries in the size of the irregular sector. The "good" equilibrium is in fact characterised, with respect to the "bad" one, by a smaller irregular sector and a stronger tax morale.

Keywords: tax morale; tax evasion; entrepreneurship; job search; irregular economy; shadow economy (search for similar items in EconPapers)
JEL-codes: A13 E26 H26 J24 J64 L26 K42 O17 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc, nep-dge, nep-ent and nep-pbe
Date: 2011-01-18
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Journal Article: Tax Morale, Entrepreneurship, and the Irregular Economy (2011)
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