SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

Abstract: This paper considers redistributive as well as political consequences of tax avoidance. When investing in tax avoidance is possible, the official tax rate does not necessarily correspond to what individuals actually pay in taxes. This affects both redistributive outcomes as well as individual's political attitudes towards taxation. Depending on the avoidance technology different political equilibria emerge. When the tax avoidance possibilities are limited, the classical conflict between rich and poor is sustained. If the tax avoidance technology is more effective, however, the equilibrium outcome can change to a situation characterized by a coalition of poor and the very richest favoring a higher tax rate. When comparing the model's predictions with data on income inequality and evidence of avoidance activity it comes surprisingly close to actual observations.

Keywords: Political equilibrium; Redistribution; Tax avoidance; Non-median voter equilibrium

JEL-codes: D72; H20; H24

34 pages, April 15, 2003

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