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Working paper

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2014

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cc-by-nc-nd, (c) Piolatto et al., 2014
Please use this identifier to cite or link to this item: https://hdl.handle.net/2445/115510

Prospect theory and tax evasion: A reconsideration of the Yitzhaki puzzle [WP]

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Abstract

The standard expected utility model of tax evasion predicts that evasion is decreasing in the marginal tax rate (the Yitzhaki puzzle). The existing literature disagrees on whether prospect theory overturns the puzzle. We disentangle four distinct elements of prospect theory and find loss aversion and probability weighting to be redundant in respect of the puzzle. Prospect theory fails to reverse the puzzle for various classes of endogenous specification of the reference level. These classes include, as special cases, the most common specifications in the literature. New specifications of the reference level are needed, we conclude.

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Frau fiscal, Ingressos fiscals, Poder adquisitiu, Auditoria fiscal

Subject (English)

Tax evasion, Internal revenue, Purchasing power, Tax auditing

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IEB (Institut d’Economia de Barcelona) – Working Papers

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PIOLATTO, Amedeo and RABLEN, Matthew D. Prospect theory and tax evasion: A reconsideration of the Yitzhaki puzzle [WP]. IEB Working Paper 2014/03. [consulted: 10 of June of 2026]. Available at: https://hdl.handle.net/2445/115510

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