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Tax evasion, tax corruption and stochastic growth

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  • Fred Célimène

    ()

  • Gilles Dufrénot

    ()

  • Gisèle Mophou

    ()

  • Gaston N’Guérékata

Abstract

This paper presents a continuous time stochastic growth model to study the e¤ects of tax evasion and tax corruption on the level and volatil- ity of private investment and public spending. Our results suggest that there do exist several regimes of mean growth and growth volatility, de- pending upon the consumer’s degree of risk aversion, the tax income yield, the risk-adjusted return of the agent’s portfolio, the productivity of public spending. We nd that public spending is described asymptotically by an incomplete upper Gamma distribution, while private capital is described by a power law distribution. Depending upon the values of the parame- ters of these distributions, growth can be characterized by extreme values (high volatility) when the return to taxation lies under a certain threshold and/or when the risk-adjusted return of investing the proceeds of illegal activities evolves above a given threshold. We provide an empirical illus- tration of the model.

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Bibliographic Info

Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number wp1043.

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Length: pages
Date of creation: 15 Feb 2013
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Handle: RePEc:wdi:papers:2013-1043

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Keywords: Stochastic growth; tax evasion; tax corruption;

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  1. Turnovsky, S.J., 1991. "The Impact of terms of Trade Shocks on a Small Open Economy: A Stochastic Analysis," Working Papers, University of Washington, Department of Economics 91-19, University of Washington, Department of Economics.
  2. Paolo Mauro, 2004. "The Persistence of Corruption and Slow Economic Growth," IMF Staff Papers, Palgrave Macmillan, vol. 51(1), pages 1.
  3. Ratbek Dzhumashev, 2007. "Corruption, Uncertainty And Growth," Development Research Unit Working Paper Series, Monash University, Department of Economics 15-07, Monash University, Department of Economics.
  4. Friedrich Schneider & Andreas Buehn & Claudio Montenegro, 2010. "New Estimates for the Shadow Economies all over the World," International Economic Journal, Taylor & Francis Journals, Taylor & Francis Journals, vol. 24(4), pages 443-461.
  5. Stephen Turnovsky, 1998. "On the Role of Government in a Stochastically Growing Open Economy," Working Papers, University of Washington, Department of Economics 0073, University of Washington, Department of Economics.
  6. 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.
  7. Cerqueti, Roy & Coppier, Raffaella, 2011. "Economic growth, corruption and tax evasion," Economic Modelling, Elsevier, Elsevier, vol. 28(1), pages 489-500.
  8. 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.
  9. Hindriks, J. & Keen, M. & Muthoo, A., 1998. "Corruption, Extortion and Evasion," Discussion Papers, Exeter University, Department of Economics 9809, Exeter University, Department of Economics.
  10. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, Elsevier, vol. 1(3-4), pages 323-338, November.
  11. Sanyal, Amal & Gang, Ira N & Goswami, Omkar, 2000. " Corruption, Tax Evasion and the Laffer Curve," Public Choice, Springer, Springer, vol. 105(1-2), pages 61-78, October.
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