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Abstract

In a multi community environment local authorities compete for tax base. When monitoring is imperfect, agents may decide not to pay in their community (evasion), and save the tax difference. The agent decision on where to pay taxes is based on the probability of getting caught, the fine he eventually will have to pay and the time cost of paying in a neighbor community. First, we prove that if the focus of the agents’ decision is the probability of getting caught and the fine, only the richest people evade. If instead, the key ingredient is the time cost of evading, only the poorest cheat. Second, we test the evasion pattern on the Automobile Registration System in Uruguay using two stochastic dominance tests. The evidence favors in this case the hypothesis that richer people are the evaders.

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