Cultural norms, the persistence of tax evasion, and economic growth

Abstract

I study the effects of tax evasion on economic growth by focusing on the cultural aspects of tax compliance and their effect on the extensive margin of tax evasion. A cultural norm that determines the contemptibility of tax dodging practices links the past incidence of tax evasion with the tax payers' current incentives to conceal sources of income. This dynamic complementarity may lead to multiple equilibria in the evolution of tax evasion. Due to the latter's effect on capital accumulation, this multiplicity may lead economies in divergent development paths, as long as they differ in the initial magnitude of tax evasion. This happens even though economies may be, on the outset, identical in terms of capital stock and structural characteristics, including those that govern tax enforcement. JEL Classification E62 · H26 · O41 · Z10Acknowledgements I am grateful to two anonymous referees for their valuable comments and suggestions on an earlier draft. The usual disclaimer applies.

Tax evasion, social norms, and economic growth

“…The majority of dynamic papers that formalize tax evasion decisions assume that tax collection is wasted or that it is entirely used to finance a public consumption good. Two exceptions are Chen () and Varvarigos (), who consider the possibility that public revenues can be devoted to constitute a productive public good. However, the first one, as most of the dynamic analysis in the literature, focusses only on the long‐run relationship between taxation and economic growth, whereas the second one does not analyze the dynamics of the evaded taxes since the individual amount of concealed income is assumed to be exogenous.…”

“…However, the first one, as most of the dynamic analysis in the literature, focusses only on the long‐run relationship between taxation and economic growth, whereas the second one does not analyze the dynamics of the evaded taxes since the individual amount of concealed income is assumed to be exogenous. Moreover, Varvarigos () focusses on labor instead of capital income tax evasion.…”

“…This, in turn, allows us to document not only cross‐country variations in levels of tax evasion but also to account for the evolution of these levels over time. The most closely related paper is Varvarigos (), which incorporates a social norm into an overlapping generations model (OLG) model and analyzes the evolution of tax evasion along the transitional path. However, in contrast to the present paper, Varvarigos () assumes that the amount of concealed income is exogenous, implying that individuals’ decisions are only about evading or not evading taxes.…”

“…The most closely related paper is Varvarigos (), which incorporates a social norm into an overlapping generations model (OLG) model and analyzes the evolution of tax evasion along the transitional path. However, in contrast to the present paper, Varvarigos () assumes that the amount of concealed income is exogenous, implying that individuals’ decisions are only about evading or not evading taxes. Furthermore, taxation and the possibility of evading taxes is only for young agents with respect to their labor income, whereas capital income tax evasion is not considered.…”

Call to Action: Intrinsic Motives and Material Interests

“…In fact, our paper is relevant to an even wider class of studies. Consider, for example, the model proposed by[29], where practices of tax evasion, as soon as they have been established, are perpetuated as history-dependent cultural norms. Our paper can be seen as complementary to his, due to the fact that we focus on the mechanism by which cultural indoctrination takes place across generations.…”