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CORRUPTION AND TAX EVASION: REFLECTIONS ON GREEK TRAGEDY

 

 

Anastasia Litina

University of Luxembourg

 

Theodore Palivos

Athens University of Economics and Business

 

Abstract

We provide empirical support and a theoretical explanation for the vicious circle of political corruption and tax evasion in which countries often fall into. We address this issue in the context of a model with two distinct groups of agents: citizens and politicians. Citizens decide the fraction of their income for which they evade taxes. Politicians decide the fraction of the public budget that they peculate. We show that multiple self-fulfilling equilibria with different levels of corruption can emerge based on the existence of strategic complementarities, indicating that “corruption” may corrupt. Furthermore, we find that standard deterrence policies cannot eliminate the multiplicity of equilibria. Instead, policies that impose a strong moral cost on tax evaders and corrupt politicians can lead to a unique equilibrium.

 

JEL Classification: D73; E62; H26

 

Keywords: Corruption, Tax Evasion, Multiple Equilibria, Social Stigma

 

 

 

Acknowledgment: This paper benefited from financial support by the Bank of Greece. The views expressed in this paper are those of the author and do not necessarily reflect those of the Bank of Greece. Any errors are our own.

 

 

 

Correspondence:

Theodore Palivos

Athens University of Economics and Business

76 Patission, Str.

104 34, Athens,

e-mail: tpalivos@aueb.gr

Tel: +30210 8203 346


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