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Tax Evasion in a Model of Endogenous Growth

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Author Info
Been-Lon Chen (Academia Sinica)

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Abstract

This paper integrates tax evasion into a standard AK growth model with public capital. In the model, the government optimizes the tax rate, while individuals optimize tax evasion. It studies tax rate, tax evasion and economic growth, and compares them with otherwise identical economies except those without tax evasion. It inquires into the effects of three government policies on tax rate, tax evasion, and economic growth. It finds that an increase in both unit cost of tax evasion and punishment–fines reduces tax evasion, whereas an increase in tax auditing reduces tax evasion only if the cost of tax enforcement is not too high. The three policies theoretically have ambiguous effects upon economic growth, due to their indirect effects upon tax evasion and optimal tax rate. The model is calibrated to quantitatively assess the effects of the three above-mentioned policies. It finds that the three policies are quantitatively effective in discouraging tax evasion, but with small growth effects, unless the degree of government externality is very high. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/S1094-2025(03)00002-4
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Publisher Info
Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 6 (2003)
Issue (Month): 2 (April)
Pages: 381-403
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Handle: RePEc:red:issued:v:6:y:2003:i:2:p:381-403

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Related research
Keywords: Tax evasion; Economic growth; Deterrence;

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Find related papers by JEL classification:
E2 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment
O4 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

References listed on IDEAS
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Dzhumashev, Ratbek & Gahramanov, Emin, 2008. "Can We Tax the Desire for Tax Evasion?," MPRA Paper 11960, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  2. Jordi Caballé & Judith Panadés, 2007. "Tax Rates, Tax Evasion, and Growth in a Multi-period Economy," Hacienda Pública Española, IEF, vol. 183(4), pages 67-80, december. [Downloadable!]
  3. Djumashev, Ratbek, 2006. "Corrupt Bureaucracy and Growth," MPRA Paper 2082, University Library of Munich, Germany. [Downloadable!]
  4. Rangan Gupta, 2005. "Endogenous Tax Evasion and Reserve Requirements: A Comparative Study in the Context of European Economies," Computing in Economics and Finance 2005 328, Society for Computational Economics. [Downloadable!]
  5. Ratbek Dzhumashev, 2006. "Public Goods, Corruption And Growth???," Monash Economics Working Papers 15/06, Monash University, Department of Economics. [Downloadable!]
  6. Rangan Gupta, 2005. "Tax Evasion and Financial Repression," Working papers 2005-34, University of Connecticut, Department of Economics, revised Jun 2007. [Downloadable!]
    Other versions:
  7. Rangan Gupta & Emmanuel Ziramba, 2008. "Misalignment in the Growth-Maximizing Policies under Alternative Assumptions of Tax Evasion," Working Papers 200819, University of Pretoria, Department of Economics. [Downloadable!]
  8. Pierre-Richard Agénor & Kyriakos C. Neanidis, 2007. "Optimal Taxation and Growth with Public Goods and Costly Enforcement," Centre for Growth and Business Cycle Research Discussion Paper Series 89, Economics, The Univeristy of Manchester. [Downloadable!]
  9. Monica Keneley, 2004. "In the Service of the Society: Labour Management Practices in the Australian Life Insurance Industry to 1940," Economics Series 2004_19, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance. [Downloadable!]
  10. Rangan Gupta & Emmanuel Ziramba, 2008. "Tax Evasion and Financial Repression: A Reconsideration Using Endogenous Growth Models," Working Papers 200808, University of Pretoria, Department of Economics.
  11. Rangan Gupta, 2004. "Costly State Monitoring and Reserve Requirements," Working papers 2004-33, University of Connecticut, Department of Economics, revised Jul 2005. [Downloadable!]
  12. Rangan Gupta, 2005. "A Generic Model of Financial Repression," Working papers 2005-20, University of Connecticut, Department of Economics, revised Jul 2005. [Downloadable!]
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