Paper 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 to 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.

Paper jointly written with Cecilia Noboa

Alvaro Forteza: PhD in Economics, Gothenburg University. Profesor titular en la Universidad de la República de Uruguay.