Inequality, tax avoidance and financial instability

Abstract

We model the link between inequality, lack of political commitment, and ex-cessive risk taking. If politicians cannot commit to a long-term tax schedule, increasing returns to tax avoidance induce the middle class to take on non rewarded ?nancial risk despite risk aversion. Electoral pressure may lead an incumbent politician to endorse this excessive risk taking if income inequal-ities are large. By increasing the scope for tax avoidance, globalization of capital and human capital markets might have increased ?nancial fragility.

Reference

Augustin Landier, and Guillaume Plantin, “Inequality, tax avoidance and financial instability”, TSE Working Paper, n. 11-282, October 2011.