Dynamic Tax Evasion with Habit Formation in Consumption* |
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Authors: | Michele Bernasconi Rosella Levaggi Francesco Menoncin |
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Institution: | 1. Università Ca’ Foscari, 30121 Venice, Italy;2. Università di Brescia, 25122 Brescia, Italy |
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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. |
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Keywords: | Fiscal audit lifetime decisions simulations tax compliance |
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