Tax Evasion And Trust

this paper I take a "public choice" approach to the problem of tax evasion. The basic hypothesis of the field of economics known as "public choice" is that the citizens of democratic political jurisdictions perceive a connection between the taxes they pay and the government services they receive. In its strong form, the hypothesis is that citizens know that taxes are the "price" paid for public expenditures, part of an "implicit contract" with other citizens and with Bordignon (1993) develops a "fairness" approach in which public goods are introduced as well. In this model, an increase in tax rates yields more evasion, in accordance with the empirical evidence. 6 the government. In its strong form this would require that citizens are capable of some very sophisticated calculations. Still, in a democracy, citizens elect governments to provide them with goods and services and there is a certain sense in which every citizen must be aware that taxes must be paid to finance public services, whether they think their own burden is too high or low. And every citizen, even those residing in Ontario, Canada, where the government has been elected on and is carrying out an extensive program of tax cuts, must be aware that if taxes are reduced, a reduction in public services must follow. One version of this approach was used by Cowell and Gordon, who introduce public goods into the Yitzhaki model of tax evasion (1988). However the results remain at variance with the empirical evidence. Their result is that, if individuals display decreasing absolute risk aversion, the effect on tax evasion of an increase in the tax rate is positive or negative as public goods are under- or over-provided. Thus, if public goods are under-provided, an increase in tax rates means an increase in public ..