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Can We Tax the Desire for Tax Evasion?

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Abstract

A static income tax evasion model à la Yitzhaki (1974) predicts that an increase in the tax rate causes taxpayers to increase their income declaration. In an important contribution, Lin and Yang (2001) obtained exactly the opposite result by extending the Yitzhaki (1974) model to a dynamic one with Ak(t) production technology. In this paper we show that once the Lin and Yang (2001) model becomes fully compatible with the Yitzhaki’s (1974) setting, the negative relationship between taxes and evasion still prevails. We then enrich the dynamic model with a productive public sector, and obtain an ambiguous relationship between taxes and evasion incentives as in Allingham and Sandmo (1972). We also prove that the growth-maximizing share of public expenditures in total output satisfies the natural efficiency condition even in the presence of tax evasion. However, the latter result is not robust to the introduction of the costs associated with income declaration and concealment activities.

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File URL: http://www.deakin.edu.au/buslaw/aef/workingpapers/papers/2008_19eco.pdf
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Bibliographic Info

Paper provided by Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance in its series Economics Series with number 2008_19.

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Length: 20 pages
Date of creation: 29 Oct 2008
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Handle: RePEc:dkn:econwp:eco_2008_19

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Keywords: Tax Evasion; Optimal Taxation; Economic Growth;

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  7. Ralph-C Bayer & Matthias Sutter, 2003. "The excess burden of tax evasion – An experimental detection-concealment contest," Papers on Strategic Interaction, Max Planck Institute of Economics, Strategic Interaction Group 2003-28, Max Planck Institute of Economics, Strategic Interaction Group.
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  22. Lin, Wen-Zhung & Yang, C. C., 2001. "A dynamic portfolio choice model of tax evasion: Comparative statics of tax rates and its implication for economic growth," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 25(11), pages 1827-1840, November.
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