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Redistribution through tax evasion

Adam, Antonis and Kammas, Pantelis (2012): Redistribution through tax evasion.

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Abstract

Using a simple model of income redistribution, we examine the effect of income inequality on redistribution in the presence of tax evasion. Our results suggest that in the presence of tax evasion, a political equilibrium may be characterized by inefficiently high tax rate, i.e. higher than the revenue maximizing tax rates. Moreover in contrast to the conventional wisdom higher income inequality may be associated with lower redistribution. This is because in countries with weak institutional framework political parties may increase the probability of winning the elections by choosing policies that expand the number of tax evading individuals.

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