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Explaining the nonlinearity of inflation and economic growth: The role of tax evasion

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  • Hung, Fu-Sheng

Abstract

This paper incorporates tax evasion into a simple endogenous growth model with money in the utility function. Government in the economy finances its constant fraction of unproductive expenditures through taxing output, penalty revenues, and seigniorage. By endogenizing the individual decision of tax evasion, we show that the ratio of government tax revenues over output is not monotonously related to the tax rate, whereas economic growth is always decreasing in the tax rate. We then consider a scenario that the government first selects a growth rate of nominal money and then the tax rate is endogenously determined by the government budget constraint. Given this, our model finds a threshold level of inflation in which the inflation-growth nexus may be positive or negative for initial inflation below it, but is definitely negative for initial inflation over it. We also find that the negative relationship for initial inflation over this threshold level is convex. These conclusions are consistent with recent empirical studies.

Suggested Citation

  • Hung, Fu-Sheng, 2017. "Explaining the nonlinearity of inflation and economic growth: The role of tax evasion," International Review of Economics & Finance, Elsevier, vol. 52(C), pages 436-445.
  • Handle: RePEc:eee:reveco:v:52:y:2017:i:c:p:436-445
    DOI: 10.1016/j.iref.2017.03.008
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    Cited by:

    1. Tri Wahyu Adi & Eri Prabowo & Oetami Prasadjaningsih, 2022. "Influence of Electricity Consumption of Industrial and Business, Electricity Price, Inflation and Interest Rate on GDP and Investments in Indonesia," International Journal of Energy Economics and Policy, Econjournals, vol. 12(3), pages 331-340, May.
    2. Mursal Harahap & Bonar M. Sinaga & Adler H. Manurung & Tubagus Nur Ahmad Maulana, 2018. "Impact of Policies and Macroeconomic Variables on Tax Revenue and Effective Tax Rate of Infrastructure, Utility, and Transportation Sector Companies Listed in Indonesia Stock Exchange," International Journal of Economics and Financial Issues, Econjournals, vol. 8(3), pages 95-104.
    3. Menichini, Amilcar A., 2020. "How do firm characteristics affect the corporate income tax revenue?," International Review of Economics & Finance, Elsevier, vol. 65(C), pages 146-162.
    4. Akhtar Gul & Fatima Zahra & Anum Iqbal & Tanbila Ghafoor & Musaddiq Hussain, 2020. "Linkage Between Poverty, Inequality, and Income Distribution: A Case on Bannu District, Pakistan," Asian Development Policy Review, Asian Economic and Social Society, vol. 8(4), pages 330-339, December.

    More about this item

    Keywords

    Tax evasion; Seigniorage; Inflation; Economic growth;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O42 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models

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