Tax Evasion and Habit Formation

• Autores: Judith Panadés Martí
• Localización: XII Encuentro de Economía Pública. Evaluación de las Políticas Públicas: Palma de Mallorca. Los días 3 y 4 de febrero de 2005, 2005, pág. 75
• Idioma: inglés
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• Resumen

  • The introduction of habit formation in preferences means that the individuals derive utility from the comparison of the current level of own consumption with that in the previous period. Therefore, when individuals choose their current consumption, they are simultaneously setting a standard of living that will be used to evaluate the utility accruing from the level of future consumption. This paper analyzes how the introduction of habits modifies the optimal tax evasion decision. I consider a two period model where the taxpayer has to decide the amount of income he wants to report to the tax authorities and the amount he wants to save. When individuals conceal part of their true income from the tax authority, they face the risk of being audited and hence of paying the corresponding fine. I show that, under decreasing absolute risk aversion the introduction of habit formation reduces the amount of evaded income.