Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/89908
Authors: 
Piolatto, Amedeo
Rablen, Matthew D.
Year of Publication: 
2013
Series/Report no.: 
IZA Discussion Paper 7760
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.
Subjects: 
prospect theory
tax evasion
Yitzhaki puzzle
stigma
diminishing sensitivity
reference dependence
endogenous audit probability
endogenous reference level
JEL: 
H26
D81
K42
Document Type: 
Working Paper

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