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Prospect theory and tax evasion: a reconsideration of the Yitzhaki Puzzle

Author

Listed:
  • Amedeo Piolatto

    (Institute for Fiscal Studies and Barcelona Economics Institute, University of Barcelona)

  • Matthew D. Rablen

    (Institute for Fiscal Studies and Sheffield University)

Abstract
The standard expected utility model of tax evasion predicts that evasion is decreasing in the marginal tax rate (the Yitzhaki Puzzle). The existing literature disagrees on whether prospect theory overturns the puzzle. We disentangle four distinct elements of prospect theory and find loss aversion and probability weighting to be redundant in endogenous specification of the reference level. These classes include, as special cases, the most common specifications in the literature. New specifications of the reference level are needed, we conclude.

Suggested Citation

  • Amedeo Piolatto & Matthew D. Rablen, 2013. "Prospect theory and tax evasion: a reconsideration of the Yitzhaki Puzzle," IFS Working Papers W13/25, Institute for Fiscal Studies.
    • Handle: RePEc:ifs:ifsewp:13/25
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    References listed on IDEAS

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    1. Prospect theory and tax evasion: a reconsideration of the Yitzhaki Puzzl
      by Alessandro Cerboni in Knowledge Team on 2013-09-21 21:08:21

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    8. Ekaterina N. Nevzorova & Anna P. Kireenko & Roman A. Sklyarov, 2017. "Bibliometric Analisis of the Literature on Tax Evasion in Russia and Foreign Countries," Journal of Tax Reform, Graduate School of Economics and Management, Ural Federal University, vol. 3(2), pages 115-130.
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    11. Rao, R. Kavita & Tandon, Suranjali, 2016. "Revisiting the tax compliance problem using prospect theory," Working Papers 16/169, National Institute of Public Finance and Policy.
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    More about this item

    Keywords

    prospect theory; tax evasion; Yitzhaki puzzle; stigma; diminishing sensitivity; reference dependence; endogenous audit probability; endogenous reference level;
    All these keywords.

    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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