A Theoretical Note on Tax Evasion: The Case of the American FairTax Plan

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Issues that occur with any tax system involve the incentives and disincentives of individuals to evade the tax. This theoretical note investigates how risk preferences could affect tax evasion under the proposed FairTax. We develop a constrained utility-maximization framework to examine how individuals with different risk preferences could respond to a broad-based sales tax based on the costs associated with tax evasion.