Working Paper: NBER ID: w19804
Authors: Daniel M. Hungerman
Abstract: A large literature explores crowd out in situations where public goods are jointly provided; work in this area typically depicts a tax system where individuals take taxes as given. But in some settings, such as those in developing economies, efforts to evade or avoid taxes may be widespread. Using the canonical warm-glow model, this paper considers joint pubic-good provision in a setting where individuals can evade taxes by hiding their income. The model's implications change significantly in this setting: with hidden income, stronger warm glow will lead to greater crowd out, not less. Using research on crowd out and inter-family transfers, I present suggestive evidence that the model's results may help to reconcile divergent estimates of crowd out in the literature.
Keywords: public goods; hidden income; tax evasion; crowd out; warm glow
JEL Codes: H26; H41; O17
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| hidden income (H26) | crowd out (E62) |
| stronger warm glow (Y60) | greater crowd out (E62) |
| hiding income (H26) | lower tax revenues (H29) |
| lower tax revenues (H29) | decreases public good provision (H40) |
| stronger warm glow (Y60) | hidden income response (H26) |
| hidden income response (H26) | larger crowd out effect (C92) |
| high inclinations to hide income (H26) | negative relationship between warm glow and crowd out (D62) |
| low inclinations to hide income (H26) | positive relationship between warm glow and crowd out (D64) |