The paper suggests an explanation for the geographical dimension of tax evasion that focuses on the structure of territorial government. Taxes administered by the central government are not differentiated by regions. Poor areas may prefer a combination of lower taxes and lower levels of public services at both the central and the local level. This is especially true when income and wealth levels differ among the areas and the demand for publicly provided goods is correlated to these levels. But the use of nationally uniform tax schedules imposes a welfare burden on poorer areas. While the tax rates of local taxes can be adjusted to local preferences, tax evasion may be tacitly accepted as a compensation for the welfare loss deriving from too high centrally set tax rates.
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