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Tax Rates, Tax Evasion, and Growth in a Multi-period Economy

  • Jordi Caballé

    (Unitat de Fonaments de l’Anàlisi Econòmica and CODE, Universitat Autònoma de Barcelona)

  • Judith Panadés

    (Unitat de Fonaments de l’Anàlisi Econòmica and CODE, Universitat Autònoma de Barcelona)

We extend the basic tax evasion model to a multi-period economy exhibiting sustained growth. When individuals conceal part of their true income from the tax authority, they face the risk of being audited and hence of paying the corresponding fine. Both taxes and fines determine individual saving and the rate of capital accumulation. We show that, if the penalty imposed on tax evaders is proportional to the amount of evaded taxes, then the growth rate is decreasing in the tax rate. However, the relationship between growth and tax rate becomes non-monotonic when the penalty rate is imposed on the amount of evaded income.

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Article provided by IEF in its journal Hacienda Pública Española/Revista de Economía Pública.

Volume (Year): 183 (2007)
Issue (Month): 4 (december)
Pages: 67-80

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Handle: RePEc:hpe:journl:y:2007:v:183:i:4:p:67-80
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  1. 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.
  2. Panades, Judith, 2001. "Tax evasion and Ricardian equivalence," European Journal of Political Economy, Elsevier, vol. 17(4), pages 799-815, November.
  3. Jordi Caballé & Judith Panadés, 2004. "Cost Uncertainty and Taxpayer Compliance," UFAE and IAE Working Papers 640.04, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  4. Judith Panadés, 2004. "Tax Evasion and Relative Tax Contribution," Public Finance Review, , vol. 32(2), pages 183-195, March.
  5. Clotfelter, Charles T, 1983. "Tax Evasion and Tax Rates: An Analysis of Individual Returns," The Review of Economics and Statistics, MIT Press, vol. 65(3), pages 363-73, August.
  6. James M. Poterba, 1987. "Tax Evasion and Capital Gains Taxation," NBER Working Papers 2119, National Bureau of Economic Research, Inc.
  7. Landskroner, Yoram & Paroush, J & Swary, Itzhak, 1990. "Tax Evasion and Portfolio Decisions," Public Finance = Finances publiques, , vol. 45(3), pages 409-22.
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