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Income inequality and redistribution: the role of tax evasion

Adam, Antonis and Kammas, Pantelis (2012): Income inequality and redistribution: the role of 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, higher income inequality may be associated with lower per capita transfers but inefficiently high taxation. This is because in countries characterized by weak institutional framework parties may increase the probability of winning the elections by choosing policies that expand the number of tax evading individuals.

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