Morality, tax evasion, and equity

• Higher-income taxpayers may evade more or less than lower-income taxpayers.
• An increase in morality increases expected tax revenues.
• Evasion makes the tax system regressive at low levels of morality.
• Evasion makes the tax system progressive at high levels of morality.

This paper considers tax evasion with morality and its implication for equity of the tax system. In the standard model of tax evasion without moral costs, higher-income taxpayers evade more, relative to their incomes, than lower-income taxpayers, and evasion makes the tax system regressive. With moral costs, equity of the tax system depends on the degree of morality. As the level of morality in society increases, it increases moral costs of evasion and evasion become inferior. Higher-income taxpayers evade less and pay more taxes, and evasion makes the tax system progressive for a high level of morality. The opposite holds true and evasion makes the tax system regressive for a low level of morality.