Relative Consumption and Tax Evasion

29 Pages Posted: 30 Jan 2013

See all articles by Laszlo Goerke

Laszlo Goerke

University of Trier - Institute of Labour Law and Industrial Relations in the European Union; CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Date Written: January 29, 2013

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

JEL Classification: D620, H210, H230, H240, H260

Suggested Citation

Goerke, Laszlo, Relative Consumption and Tax Evasion (January 29, 2013). CESifo Working Paper Series No. 4077, Available at SSRN: https://ssrn.com/abstract=2208442

Laszlo Goerke (Contact Author)

University of Trier - Institute of Labour Law and Industrial Relations in the European Union ( email )

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