Income distribution and equilibrium multiplicity in a stigma-based model of tax evasion

This paper incorporates continuous income distribution into the stigma-based model of tax compliance. The paper investigates the effect of income distribution on the existence of multiple equilibria, and characterizes the conditions under which multiple equilibria emerge. Precisely, multiple equilibria exist if taxpayer incomes are sufficiently homogeneous, because the ‘social coordination effect’ dominates the ‘individual characteristics effect’. Numerical simulations show that the main proposition is robust to allowing two-step audit policies on the part of the tax agency, under the presumption that the best (or good) equilibrium is selected whenever there are multiple equilibria. As a byproduct, the effect of various forms of tax reforms on the optimal two-step audit policy, the equilibrium compliance, and fiscal revenue is analyzed.