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Tax Evasion on a Social Network
1 : University of Exeter
2 : University of Sheffield
* : Corresponding author
We relate tax evasion behaviour to a substantial literature on self and social comparison in judgements. Taxpayers engage in tax evasion as way to potentially boost their consumption relative to others in their "local" social network, and relative to past consumption. The unique Nash equilibrium of the model relates optimal evasion to a (Bonacich) measure of network centrality: more central taxpayers evade more. The direct and indirect revenue effects from auditing are shown to be ranked by a related Bonacich centrality. We generate networks corresponding closely to the observed structure of social networks observed empirically. In particular, our networks contain celebrity taxpayers, whose consumption is widely observed, and who are systematically of higher wealth. If the tax authority can (partially) observe the social network, we show that of the plethora of measures of centrality a tax authority might compute, the measure most correlated with evasion and direct/indirect effects is a taxpayer's in-degree centrality.
