Abstract
The dynamic model presented in this paper intends to account for the evidence, which appears to be particularly significant for Italy, of the incidence of tax evasion in a certain region being negatively correlated with the level of social capital existing in that region. Besides including social capital among the determinants of tax evasion, we extend the model so as to incorporate a mechanism whereby the existing volume of opportunistic behavior—which is proxied by the level of tax evasion—has negative effects on the formation of new social capital, thus helping to explain how regional differences in the endowment of social capital and in the incidence of tax evasion co-evolve and why they tend to be highly persistent. The model seeks also to capture the fact that in a democracy the political determination necessary to effectively repress tax evasion depends on the voters’ propensity toward the phenomenon. Hence, one should expect that–in areas where a relatively large (small) number of citizens are tax cheaters—the consensus in favor of tough policies against tax evasion tends to be weak (strong) and short (long) lasting. Consistently with this intuition, the model shows that regions where social capital is relatively low and tax evasion is relatively high can do better in the long run (i.e., they can reach a steady state characterized by a higher level of social capital and a lower level of tax evasion) when tax-enforcement policies are determined at the national level rather than at the regional level. The opposite holds for regions where social capital is relatively high and tax evasion is relatively low.
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Notes
Seminal paper of this strand of literature is Allingham and Sandmo (1972).
The incorporation of tax morale sustained by peer pressure in models of tax evasion is due to Gordon (1989).
Deviations from rational behavior under risk in decisions concerning tax compliance are not necessarily due to the influence of the social environment, but also to other factors such as the misperception of risk.
Together with the costs in terms of popularity that the political authorities may incur to fight tax evasion, these costs may include the resources directly devoted to enforcing tax laws (such as the salaries of auditors and similar), as well as non-pecuniary costs, such as infringement of privacy. The optimal policy rule should equate the marginal social benefit of reduced evasion to the marginal cost needed to obtain this reduction of evasion. See Slemrod (2016) for a review of the current research on these matters. In a low tax evasion/high social capital equilibrium, one may think that the political costs of fighting tax evasion are low, but that also the marginal social benefits of reduced evasion are very low.
See Chen (2003) for an endogenous-growth model with tax evasion that inserts the utility from conformity in the objective function of the representative individual.
Bonatti (2008) models the idea that policies or events affecting people’s allocation of time for a limited period of time may have long-term effects on labor supply and economic growth by persistently change collective habits and social attitudes regarding time use. Giuliano and Spilimbergo (2014) show that the exposure to a relatively short-term shock such as a recession may have long-lasting effects on people’s preference for redistribution.
This measure is the percentage of people aged 18–49 stating, in a survey conducted by the Italian National Institute of Statistics (ISTAT), that—generally speaking—most people can be trusted.
The exception is Latium, that appears to be the most virtuous region in terms of VAT compliance. One should notice, however, that the figure for Latium is conditioned by the fact that many state and state-controlled entities have their registered offices in Rome, Italy’s capital city, which is in this region.
According to Battiston et al. (2016), the audit “blitzes” that took place in Italian cities in 2011-12 were deliberately designed to attract maximum media exposure by the Monti government, so as to show that the fight to tax evasion was an organic component of the consolidation efforts made necessary by the major public debt sustainability crisis that Italy was facing in that period. One may interpret the progressive limitation of the powers of Equitalia (the Italian publicly controlled agency that was in charge of tax debt collection), which has occurred in recent years until its final suppression, as a way to flatter the reluctant taxpayers. OECD (2016) points out that these limitations may have nurtured a culture of “evasion from collection,” since thanks to them some taxpayer can be tempted to declare appropriately but then decide not to pay and put in place strategies to hide wealth.
The three cases examined above satisfy. \( \xi > 1 - \left[ {{\raise0.7ex\hbox{${2\sqrt D }$} \!\mathord{\left/ {\vphantom {{2\sqrt D } {\left( {1 + D} \right)}}}\right.\kern-0pt} \!\lower0.7ex\hbox{${\left( {1 + D} \right)}$}}} \right] \). If \( \xi < 1 - {\raise0.7ex\hbox{${2\sqrt D }$} \!\mathord{\left/ {\vphantom {{2\sqrt D } {\left( {1 + D} \right)}}}\right.\kern-0pt} \!\lower0.7ex\hbox{${\left( {1 + D} \right)}$}} \), we do not have a cusp (see Crane et al. 2000).
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Bonatti, L., Lorenzetti, L. The co-evolution of tax evasion, social capital and policy responses: a theoretical approach. Int Rev Econ 65, 381–401 (2018). https://doi.org/10.1007/s12232-018-0301-3
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DOI: https://doi.org/10.1007/s12232-018-0301-3