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Tax Evasion: Does the Tax Burden Matter?

Michele Bernasconi, Luca Corazzini, Raffaello Seri
Authors registered in the RePEc Author Service: Luca Corazzini (), Michele Bernasconi () and Raffaello Seri

No 43, ISLA Working Papers from ISLA, Centre for research on Latin American Studies and Transition Economies, Universita' Bocconi, Milano, Italy

Abstract: We study the effects of the tax burden on tax evasion both theoretically and experimentally. We develop a model of tax evasion decision that is based on two ideas from behavioral economics: 1) taxpayers are endowed with reference dependent preferences that are subject to hedonic adaptation; and 2) in making their choices, taxpayers are affected by ethical concerns. The model generates new predictions about the effects of a change in the tax rate on the decision to evade taxes. Contrary to the classical expected utility model, but consistently with previous applications of reference dependent preferences to taxpayers’ decisions, an increase in the tax rate increases tax evasion. However, the converse is not true. Moreover, as taxpayers adapt to the new legal tax rate, the decision to evade taxes becomes independent from the tax rate. We present results from a laboratory experiment that support the main predictions of the model.

Keywords: Tax Evasion; Prospect Theory; Adaptation (search for similar items in EconPapers)
JEL-codes: H26 D03 C91 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2012-01
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