PROSPECT THEORY AND TAX COMPLIANCE: A MICROFOUNDED EQUILIBRIUM PERSPECTIVE

Authors

  • Maria Carmela APRILE University of Naples "Parthenope"
  • Francesco BUSATO University of Naples "Parthenope"
  • Francesco GIULI University of Naples "Parthenope"
  • Enrico MARCHETTI University of Naples "Parthenope"

DOI:

https://doi.org/10.35774/jee2019.02.177

Keywords:

Tax evasion, fiscal policy, prospect theory.

Abstract

This paper discusses the capabilities of a class of microfounded equilibrium models, augmented with Prospect Theory elements in the spirit of al- Nowaihi and Dhami (2007), to address several open questions in the analysis of tax evasion and compliance decisions. There are three main results: i) there exists a unique equilibrium with a tax evasion, consistent with the empirical estimates for the United States economy; ii) the model predicts a positive relationship between tax rate and evasion rate, while offering a solution to the so called Yitzhaki puzzle; iii) the «framing effect» plays a significant role in supporting these results; this is a distinctive characterstic of this class of model, typically not present in simple individual choice models. Furthermore, the model also allows us to investigate some potentially relevant effects of labor supply behavior on the tax compliance decisions.

JEL: E21; D03; D81; H03.

Author Biographies

Maria Carmela APRILE, University of Naples "Parthenope"

Department of Economic and Legal Studies

Francesco BUSATO, University of Naples "Parthenope"

Department of Economic Studies

Francesco GIULI, University of Naples "Parthenope"

Department of Economic and Legal Studies

Enrico MARCHETTI, University of Naples "Parthenope"

Department of Economic and Legal Studies

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Published

05.09.2019

How to Cite

APRILE, Maria Carmela, et al. “PROSPECT THEORY AND TAX COMPLIANCE: A MICROFOUNDED EQUILIBRIUM PERSPECTIVE”. Journal of European Economy, vol. 18, no. 2, Sept. 2019, pp. 177-98, doi:10.35774/jee2019.02.177.

Issue

Section

INTERNATIONAL ECONOMICS