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Inequality, Tax Avoidance, and Financial Instability

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  • Landier, Augustin
  • Plantin, Guillaume

Abstract

We model the link between inequality and excessive risk taking. In the presence of increasing returns to tax avoidance, the middle class is willing to take non rewarded financial risk despite risk aversion. Electoral pressure may lead an incumbent politician to endorse this excessive risk taking if the right tail of wealth distribution is sufficiently fat. By increasing the scope for tax avoidance, globalization of capital and human capital markets might have increased financial fragility.

Suggested Citation

  • Landier, Augustin & Plantin, Guillaume, 2011. "Inequality, Tax Avoidance, and Financial Instability," CEPR Discussion Papers 8391, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:8391
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    1. Pierre Chaigneau & Louis Eeckhoudt, 2020. "Downside risk-neutral probabilities," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 8(1), pages 65-77, April.

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    More about this item

    Keywords

    Tax avoidance; Financial instability;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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