Tax Evasion and Public Expenditures on Tax Collection Services in an Endogenous Growth Model
AbstractThis paper analyzes the relationship between tax evasion and the two main policy instruments affecting evasion rates, namely, the announced tax rate and the share of tax revenues allocated to tax monitoring mechanisms. For doing so, we adopt a simple one-sector endogenous growth model modified under tax evasion following Roubini and Sala-i-Martin (1993) analysis on income taxes and tax evasion. Our model confirms BarroÃƒÂ¢Ã¯Â¿Â½Ã¯Â¿Â½s (1990) theoretical finding stating that the optimal tax rate is equal to the elasticity of private capital. However, when tax evasion matters to the social welfare, the effective tax rate is lower than the output elasticity in line with Futagami et al., (1993) and Turnovsky (1997) theoretical results. Our model is then calibrated using data from 145 developed and developing countries for 2011. Simulation results suggest that both tax evasion and output growth are decreasing with the share of tax revenues allocated to monitoring expenses, while welfare maximizing policies imply an announced tax rate lower from the elasticity of public capital and a share of monitoring expenses around 6.0%.
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Bibliographic InfoPaper provided by University of Crete, Department of Economics in its series Working Papers with number 1202.
Date of creation: 26 Apr 2012
Date of revision: 09 Mar 2013
tax evasion; tax monitoring; effective tax rate.;
Find related papers by JEL classification:
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
- H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion
- H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
This paper has been announced in the following NEP Reports:
- NEP-ACC-2012-11-11 (Accounting & Auditing)
- NEP-ALL-2012-11-11 (All new papers)
- NEP-DGE-2012-11-11 (Dynamic General Equilibrium)
- NEP-FDG-2012-11-11 (Financial Development & Growth)
- NEP-IUE-2012-11-11 (Informal & Underground Economics)
- NEP-PBE-2012-11-11 (Public Economics)
- NEP-PUB-2012-11-11 (Public Finance)
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