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Endogenous Tax Evasion and Reserve Requirements: A Comparative Study in the Context of European Economies

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Rangan Gupta () (ECONOMICS UNIVERSITY OF CONNECTICUT)

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Abstract

Given that data indicates several countries with same, or nearly same, degree of tax evasion but widely different levels of reserve requirements, this paper analyzes the relationship between the ``optimal" degree of tax evasion and mandatory cash reserve requirements required to be held by banks using a simple overlapping generations framework. Proceeding on the initial premises that the above observation may be a fallout of the possibilities of multiple levels of tax evasion given the reserve requirements and other policy variables, or that the optimal degree of tax evasion may be completely unaffected by the movements in reserve requirements, we find the latter to be true. The model also suggests the following: (i) An economy with a less corrupt structure will have a higher steady-state of value of reported income; (ii) Increases in the penalty rates of evading taxes would induce consumers to report greater fraction of their income, while increases in the income-tax rates would cause them to evade greater fraction of their income, and ; (iii) The model does not vindicate the popular belief in the literature that, countries with lower percentage of reported income tend to have higher reserve requirements

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 328.

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Date of creation: 11 Nov 2005
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Handle: RePEc:sce:scecf5:328

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Related research
Keywords: Reserve requirements; Tax evasion;

Find related papers by JEL classification:
E26 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Schneider, Friedrich & Klinglmair, Robert, 2004. "Shadow Economies around the World: What Do We Know?," IZA Discussion Papers 1043, Institute for the Study of Labor (IZA). [Downloadable!]
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  2. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-57, April. [Downloadable!] (restricted)
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  3. Freeman, Scott, 1987. "Reserve requirements and optimal seigniorage," Journal of Monetary Economics, Elsevier, vol. 19(2), pages 307-314, March. [Downloadable!] (restricted)
  4. Bencivenga, Valerie R & Smith, Bruce D, 1992. "Deficits, Inflation, and the Banking System in Developing Countries: The Optimal Degree of Financial Repression," Oxford Economic Papers, Oxford University Press, vol. 44(4), pages 767-90, October. [Downloadable!] (restricted)
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  5. Diamond, Peter & Yellin, Joel, 1990. "Inventories and Money Holdings in a Search Economy," Econometrica, Econometric Society, vol. 58(4), pages 929-50, July. [Downloadable!] (restricted)
  6. Christian Zimmermann, 1994. "Technology Innovations and the Volatility of Output: An International Perspective," Cahiers de recherche CREFE / CREFE Working Papers 34, CREFE, Université du Québec à Montréal. [Downloadable!]
  7. Been-Lon Chen & Yeong-Yuh Chiang & Ping Wang, 2000. "Credit Market Imperfections, Financial Activity and Economic Growth," Working Papers 0020, Department of Economics, Vanderbilt University. [Downloadable!]
  8. Joydeep Bhattacharya & Joseph H. Haslag, 2001. "On the Use of the Inflation Tax When Nondistortionary Taxes Are Available," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(4), pages 823-841, October. [Downloadable!] (restricted)
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  9. Been-Lon Chen, 2003. "Tax Evasion in a Model of Endogenous Growth," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(2), pages 381-403, April. [Downloadable!] (restricted)
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  1. Dzhumashev, Ratbek & Gahramanov, Emin, 2008. "Can We Tax the Desire for Tax Evasion?," MPRA Paper 11960, University Library of Munich, Germany. [Downloadable!]
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