Bernasconi M., Levaggi R., Menoncin F. (2019).

Dynamic Tax Evasion with Habit Formation in Consumption. The Scandinavian Journal of Economics, 122(3), pp. 966-992.

Abstract:

We model the optimal intertemporal decision of an agent who chooses tax evasion and consumption, over an infinite lifetime horizon, where consumption is driven by habits. We find that: (i) tax evaders reduce consumption in the early stages of habit accumulation and increase it over time; (ii) habit formation has a dampening effect on tax evasion; (iii) neglecting tax evasion may lead to habit overestimation; (iv) the effect of the tax rate on tax evasion is ambiguous; and (v) heavy fines are more efficient than frequent controls in reducing tax evasion.