Tax Compliance, Income Distribution and Social Norms

This paper studies the effect of income inequality on tax evasion. To discuss the topic, we present a simple model, based on Benabouand Tirole [1], that incorporates incentives for tax compliance such as punishment and fines, intrinsic motivation and social norms. Since we consider a regressive system of incentives to comply, income inequality increases the value of tax evasion although overall propensity to comply is unaffected. In this framework, we consider the hypothesis that social norms are group specific as in the case of social segregation or status related networks. We show that all the negative effects of inequalities are amplified: the difference between the tax compliance of the income groups and the value of tax evasion increase.