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Tax Evasion and Financial Repression: A Reconsideration Using Endogenous Growth Models

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  • Rangan Gupta

    ()
    (Department of Economics, University of Pretoria)

  • Emmanuel Ziramba

    ()
    (Department of Economics, University of South Africa)

Abstract

Using two dynamic monetary general equilibrium models characterized by endogenous growth, financial repression and endogenously determined tax evasion, we analyze whether financial repression can be explained by tax evasion. When calibrated to four Souther European economies, we show that higher degrees of tax evasion within a country, resulting from a higher level of corruption and a lower penalty rate, yields higher degrees of financial repression as a social optimum. However, a higher degree of tax evasion, due to a lower tax rate, reduces the severity of the financial restriction. In addition, we find the results to be robust across growth models with or without productive public expenditures. The only difference being that the policy parameters in the former case have higher optimal values.

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Bibliographic Info

Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 200808.

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Length: 26 pages
Date of creation: May 2008
Date of revision:
Handle: RePEc:pre:wpaper:200808

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Keywords: Underground Economy; Tax evasion; Macroeconomic Policy;

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Cited by:
  1. Rangan Gupta & Cobus Vermeulen, 2010. "Private and Public Health Expenditures in an Endogenous Growth Model with Inflation Targeting," Working Papers 201001, University of Pretoria, Department of Economics.
  2. Manoel Bittencourt & Rangan Gupta & Lardo Stander, 2013. "Tax evasion, financial development and inflation: theory and empirical evidence," Working Papers 201316, University of Pretoria, Department of Economics.

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