Dynamic Tax Evasion with Habit Formation in Consumption

Michele Bernasconi, Rosella Levaggi and Francesco Menoncin

Scandinavian Journal of Economics, 2020, vol. 122, issue 3, 966-992

Abstract: We model the optimal intertemporal decision of an agent who chooses tax evasion and consumption, over an infinite lifetime horizon, where consumption is driven by habits. We find the following: (i) tax evaders reduce consumption in the early stages of habit accumulation and increase it over time; (ii) habit formation has a dampening effect on tax evasion; (iii) neglecting tax evasion can lead to habit overestimation; (iv) the effect of the tax rate on tax evasion is ambiguous; (v) heavy fines are more efficient than frequent controls in reducing tax evasion.

Date: 2020
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