Tax Evasion, Technology Shocks, and the Cyclicality of Government Revenues
AbstractThis paper analyzes the behavior of the tax revenue to output ratio over the business cycle. In order to replicate the empirical evidence, we develop a simple model combining the standard Ak growth model with the tax evasion phenomenon. When individuals conceal part of their true income from the tax authority, they face the risk of being audited and hence of paying the corresponding fine. Under the empirically plausible assumptions that the intertemporal elasticity of substitution exhibits a sufficiently small value and that productivity shocks are serially correlated, we show that the elasticity of government revenue with respect to output is larger than one, which agrees with the empirical evidence. This result holds even if the tax system displays flat tax rates. We extend the previous setup to generate larger fiscal deficits when the economy experiences a recession.
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Bibliographic InfoPaper provided by Barcelona Graduate School of Economics in its series Working Papers with number 546.
Date of creation: Apr 2011
Date of revision:
Tax evasion; Technology shocks; Growth;
Other versions of this item:
- Panadés Martí Judith, 2009. "Tax Evasion, Technology Shocks and the Cyclicality of Government Revenues," Working Papers 201055, Fundacion BBVA / BBVA Foundation.
- Jordi Caballé & Judith Panadés, 2011. "Tax Evasion, Technology Shocks, and the Cyclicality of Government Revenues," UFAE and IAE Working Papers 870.11, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
- H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
- H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion
- O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
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.:
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"When It Rains, It Pours: Procyclical Capital Flows and Macroeconomic Policies,"
in: NBER Macroeconomics Annual 2004, Volume 19, pages 11-82
National Bureau of Economic Research, Inc.
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