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Tax evasion and financial repression: A reconsideration using endogenous growth models

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  • Rangan Gupta
  • Emmanuel Ziramba

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 Southern 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 Economic Research Southern Africa in its series Working Papers with number 81.

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Date of creation: 2008
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Handle: RePEc:rza:wpaper:81

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Keywords: Underground Economy; Tax Evasion; Macroeconomic Policy;

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Cited by:
  1. Bittencourt, Manoel & Gupta, Rangan & Stander, Lardo, 2014. "Tax evasion, financial development and inflation: Theory and empirical evidence," Journal of Banking & Finance, Elsevier, vol. 41(C), pages 194-208.
  2. Rangan Gupta & Cobus Vermeulen, 2010. "Private and Public Health Expenditures in an Endogenous Growth Model with Inflation Targeting," Annals of Economics and Finance, Society for AEF, vol. 11(1), pages 139-153, May.

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