Tolerance of tax evasion

Abstract

We present a formal model in which individuals want the government to tolerate tax evasion because, in the context of limited state capacity, evasion provides insurance. Preferred tolerance of tax evasion increases with income, because government programs are also redistributive. We take the model to the data using the World Values Survey. We show that both in the model and in the WVS data justification of tax evasion is increasing in individuals’ income, presents an inverted-U shape in perceived risk and is decreasing in institutional quality. Our analysis suggests that strong tax enforcement might not be popular among many citizens, particularly so in weak institutional environments