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Taxes

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We extend the traditional tax evasion model to take account of the interaction between individual compliance decisions and perceived detection probabilities. The generalization provides a rationale for "anti-tax revolutions" characterized by a sudden shift of a significant fraction of the tax paying citizenry from compliance to tax evasion with unchanged fundamentals and monitoring rules. We establish, with an application to hyperinflation, the possibility of multiple compliance equilibria with lock-in effects. Finally, we demonstrate the potential cost effectiveness of "symbolic prosecution" as an equilibrium shifting device in preference to permanent changes the monitoring process.