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Steady State Laffer Curve with the Underground Economy

  • Francesco Busato

    ()

    (Department of Economic and Legal Studies (DISEG), University of Naples Parthenope, Naples, Italy)

  • Bruno Chiarini

    (Department of Economic and Legal Studies (DISEG), University of Naples Parthenope, Naples, Italy)

This article studies equilibrium effects of fiscal policy within a dynamic general equilibrium model where tax evasion and underground activities are explicitly incorporated. In particular, we show that a dynamic general equilibrium with tax evasion may give a rational justification for a variant of the Laffer curve for a plausible parameterization. From a revenue maximizing perspective, the key policy messages are that bringing tax payers to compliance would be better than threatening to punish them if convicted and that an economy without problems of compliance is much more sensitive to myopic behavior.

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Article provided by in its journal Public Finance Review.

Volume (Year): 41 (2013)
Issue (Month): 5 (September)
Pages: 608-632

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Handle: RePEc:sae:pubfin:v:41:y:2013:i:5:p:608-632
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  1. Fiorito, Riccardo & Kollintzas, Tryphon, 2002. "Public Goods, Merit Goods, and the Relation Between Private and Government Consumption," CEPR Discussion Papers 3617, C.E.P.R. Discussion Papers.
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  12. Clarida, Richard & Gali, Jordi & Gertler, Mark, 2002. "A simple framework for international monetary policy analysis," Journal of Monetary Economics, Elsevier, vol. 49(5), pages 879-904, July.
  13. Francesco Busato & Bruno Chiarini, 2004. "Market and underground activities in a two-sector dynamic equilibrium model," Economic Theory, Springer, vol. 23(4), pages 831-861, May.
  14. Sanyal, Amal & Gang, Ira N & Goswami, Omkar, 2000. " Corruption, Tax Evasion and the Laffer Curve," Public Choice, Springer, vol. 105(1-2), pages 61-78, October.
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  18. Rajnish Mehra, 2006. "Recursive Competitive Equilibrium," NBER Working Papers 12433, National Bureau of Economic Research, Inc.
  19. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 269-300, November.
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