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Steady state Laffer curve with the underground economy

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Author Info
Francesco Busato
Bruno Chiarini

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Abstract

This paper studies equilibrium effects of fiscal policy within a dynamic general equilibrium model where tax evasion and underground activities are explicitly incorporated. In particular, we show that a dynamic general equilibrium with tax evasion may give a rational justification for a variant of the Laffer curve for a plausible parameterization. In this respect, the paper also identifies the different parameterization of the model formulation with tax evasion under which a Laffer curve exist. From a revenue maximizing perspective, the key policy messages are that bringing tax payers to compliance would be better than announcing to punish them if convicted, and that an economy without problems of compliance is much more sensitive to myopic behavior.

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Publisher Info
Paper provided by D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy in its series Discussion Papers with number 2_2009.

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Date of creation: 06 Oct 2009
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Handle: RePEc:prt:dpaper:2_2009

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Related research
Keywords: Two-sector Dynamic General Equilibrium Models; Fiscal Policy; Tax Evasion and Underground Activities.;

Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
E26 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy

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  1. Francesco Busato & Bruno Chiarini, 2004. "Market and underground activities in a two-sector dynamic equilibrium model," Economic Theory, Springer, vol. 23(4), pages 831-861, May. [Downloadable!] (restricted)
  2. Baxter, Marianne & King, Robert G, 1993. "Fiscal Policy in General Equilibrium," American Economic Review, American Economic Association, vol. 83(3), pages 315-34, June. [Downloadable!] (restricted)
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  3. David Domeij & Martin Floden, 2006. "The Labor-Supply Elasticity and Borrowing Constraints: Why Estimates are Biased," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(2), pages 242-262, April. [Downloadable!] (restricted)
    Other versions:
  4. McGrattan, Ellen R., 1994. "The macroeconomic effects of distortionary taxation," Journal of Monetary Economics, Elsevier, vol. 33(3), pages 573-601, June. [Downloadable!] (restricted)
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  5. Trabandt, Mathias & Uhlig, Harald, 2006. "How Far Are We From the Slippery Slope? The Laffer Curve Revisited," CEPR Discussion Papers 5657, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  6. Richard Clarida & Jordi Gali & Mark Gertler, 2002. "A Simple Framework for International Monetary Policy Analysis," NBER Working Papers 8870, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Galí, Jordi, 2002. "New Perspectives on Monetary Policy, Inflation and the Business Cycle," CEPR Discussion Papers 3210, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  8. Fiorito, Riccardo & Kollintzas, Tryphon, 1994. "Stylized facts of business cycles in the G7 from a real business cycles perspective," European Economic Review, Elsevier, vol. 38(2), pages 235-269, February. [Downloadable!] (restricted)
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  9. Sanyal, Amal & Gang, Ira N & Goswami, Omkar, 2000. " Corruption, Tax Evasion and the Laffer Curve," Public Choice, Springer, vol. 105(1-2), pages 61-78, October. [Downloadable!] (restricted)
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  10. Francesco Busato & Bruno Chiarini & Enrico Marchetti, 2005. "Indeterminacy, Underground Activities and Tax Evasion," Working Papers 289, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. [Downloadable!]
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  11. Fiorito, Riccardo & Kollintzas, Tryphon, 2004. "Public goods, merit goods, and the relation between private and government consumption," European Economic Review, Elsevier, vol. 48(6), pages 1367-1398, December. [Downloadable!] (restricted)
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  12. Friedrich Schneider & Dominik H. Enste, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March. [Downloadable!] (restricted)
  13. Blundell, Richard & Macurdy, Thomas, 1999. "Labor supply: A review of alternative approaches," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 27, pages 1559-1695 Elsevier. [Downloadable!] (restricted)
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  14. Agell, Jonas & Persson, Mats, 2001. "On the analytics of the dynamic Laffer curve," Journal of Monetary Economics, Elsevier, vol. 48(2), pages 397-414, October. [Downloadable!] (restricted)
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This page was last updated on 2009-11-10.

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