Tax compliance and wealth inequality

ABSTRACT

In this work, we theoretically approach optimal taxing in a public good provision context in a society where wealth is Pareto distributed. Our main result shows that high levels of wealth inequality yield lower levels of tax compliance and, consequently, lower provision of public goods.

KEYWORDS:

• Tax evasion
• wealth inequality
• public good provision

JEL CLASSIFICATION:

• D31
• H26
• H41

Acknowledgments

The authors thank useful comments from anonymous referees and acknowledge financial support from the Spanish Ministry of Economy and Competitiveness, the European Social Fund and the projects ECO2017-87245-R and BES-2015-073089.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ The model could be extended to income tax evasion, issue that we leave for further research.

² Not all types of wealth are as easy to hide, but most of the wealth of the richest is financial (Alstadsæter et al., 2017). For this reason, we refer to financial wealth.

³ This public good is assumed to be utility enhancing, such that it is included as an external argument in private utility functions (Economides, Park, and Philippopoulos 2011). We leave the possible consideration of a productivity-enhancing public good for future research.

⁴ The strategy profile $g_i=0$ $\mathrm{\forall }i$ is the unique Nash Equilibrium. However, the strategy profile $g_i=t{\omega }_i$ $\mathrm{\forall }i$ is welfare maximising.

⁵ They show, with a model of supply of tax evasion services that, in equilibrium, only rich individuals can pay for these services.

⁶ Another approach could be to consider the government’s total revenue, which would include tax and fine collection. Here, however, we focus on the tax compliance of the society.

Additional information

Funding

This work was supported by the Spanish Ministry of Economy and Competitiveness and the European Social Fund [ECO2017-87245-R and BES-2015-073089].