Tax Avoidance on a Social Network

Abstract

We analyse the tax avoidance decision of agents who cares about their consumption relative to those in their social network (social comparison) and relative to their own past consumption (habit). Taxpayers attempt to use tax avoidance as a way to raise their relative consumption. We demonstrate a direct link between optimal avoidance and the concept of (Bonacich) network centrality – ceteris paribus, more central taxpayers avoid more. Allowing for relative consumption effects reverses the comparative statics properties that obtain under the classical “portfolio” approach, a feature of which is that taxpayer’s chooses avoidance in isolation. In particular, an increase in wealth has a negative own-avoidance affect, but a positive cross-avoidance effect.

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Working Paper
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