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Tax evasion and optimal government interventions

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  • Ergene, Salim

Abstract

This paper studies optimal government interventions to recapitalize corporations under tight financial conditions. The policymaker can finance the recapitalization program through income taxes and an inflation tax on money holdings. However, households operating the labor-intensive production technology can evade their tax obligations. It becomes optimal to impose an inflation tax rather than income taxes to fund interventions as tax evasion grows. Partially monetizing recapitalization raises welfare gains, given that an inflation tax transfers resources from less to more productive sectors. Pecuniary externalities generate scope for macroprudential policies, alleviating the effects of financial shocks.

Suggested Citation

  • Ergene, Salim, 2025. "Tax evasion and optimal government interventions," Economics Letters, Elsevier, vol. 255(C).
    • Handle: RePEc:eee:ecolet:v:255:y:2025:i:c:s0165176525003234
    DOI: 10.1016/j.econlet.2025.112486
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    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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