Tax evasion, consumption of public goods and fairness

Abstract

This study shows that in general the impact of equity on tax evasion depends on how the taxpayer's risk aversion is affected by perceived equity. Then possible reasons are discussed why an increase in perceived equity may increase a person's risk aversion and thus lead to a decrease of evasion. An economic as well as a psychological argument are presented which can explain a positive relationship between risk aversion and equity, and thus, between evasion and inequity. The economic argument considers cases where the valuation of public output increases with income. The psychological argument is based on the hypothesis that people find evasion more blameworthy in a system which is considered to be just than in an unfair system. With such a norm an increase in equity increases the bad reputation or bad conscience of evaders and leads to a reduction of evasion.