CRIEFF Discussion Paper Number 0113

Why Does the Government Obey the Constitution? Theory and Application to Tax Evasion

K.J. Bernhard Neumaerker and Gerald Pech

Abstract

Under a constitution, which establishes a state under the rule of law, violations of unconstitutional laws are not punished. We argue that this is the true strength of the constitution. In our model, citizens decide on whether or not to evade taxes. For this they have to infer their probability of getting fined. The belief that - after the government defected once - a switch back to the constitution occurs is shown to be self-fulfilling in a game with imperfectly observable reliability of the government. We show that this prospect can deter even an unwilling government from defecting at the outset.

JEL Classifications
K42, H26, D7

Keywords
tax evasion, credibility, constitution, self-fulfilling expectations

K.J. Bernhard Neumaerker
Ruhr-Universitaet Bochum

Gerald Pech
University of St Andrews

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