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Tax Compliance, Income Distribution and Social Norms

The relationship between income inequality and tax evasion is a complexone. Bloomquist finds a positive correlation between a measure of income in equality and the under reporting rate for wage and salary income. On one hand, if individuals incentive for tax evasion is income related, then the share of tax evaders and the total amount of tax evaded depend on the distribution of income. On the other hand, the specific design ofthe tax system, together with social norms and laws, affect the after-tax distribution of income.

This paper studies the effect of income inequality on tax evasion. To discuss the topic, the article presents a simple model that incorporates incentives for tax compliance such as punishment and fines, intrinsic motivation and social norms.In this framework, the paper considers the hypothesis that social norms are group specific as in the case of social segregation or status related networks. The conclusion shows that all the negative effects of inequalities are amplified: the difference between the tax compliance of the income groups and the value of tax evasion increase.

Article by Fabrizio Patriarca,et al,from Sapienza University of Rome.


Full access: http://mrw.so/2KqtrD
Image by mSeattle,from Flickr-cc.

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