The underground economy and its macroeconomic consequences
This study develops a dynamic general equilibrium model in which optimizing agents evade taxes by operating in the underground economy. The cost to firms of evading taxes is that they find themselves subject to credit rationing from banks. Our model simulations show that in the absence of budgetary flexibility to adjust expenditures, raising tax rates too high drives firms into the underground economy, thereby reducing the tax base. Aggregate investment in the economy is lowered because of credit rationing. Taxes that are too low eliminate the underground economy, but result in unsustainable budget and trade deficits. Thus, the optimal rate of taxation, from a macroeconomic point of view, may lead to some underground activity.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 8 (2005)
Issue (Month): 2 ()
|Contact details of provider:|| Web page: http://www.tandfonline.com/GPRE19|
|Order Information:||Web: http://www.tandfonline.com/pricing/journal/GPRE19|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- John Moore & Nobuhiro Kiyotaki, .
1995-5, Edinburgh School of Economics, University of Edinburgh.
- Sarte, Pierre-Daniel G., 2000.
"Informality and rent-seeking bureaucracies in a model of long-run growth,"
Journal of Monetary Economics,
Elsevier, vol. 46(1), pages 173-197, August.
- Pierre-Daniel G. Sarte, 1999. "Informality and rent-seeking bureaucracies in a model of long-run growth," Working Paper 99-07, Federal Reserve Bank of Richmond.
- Dessy, Sylvain & Pallage, Stéphane, 2001.
"Taxes, Inequality and the Size of the Informal Sector,"
Cahiers de recherche
0112, Université Laval - Département d'économique.
- Dessy, Sylvain & Pallage, Stephane, 2003. "Taxes, inequality and the size of the informal sector," Journal of Development Economics, Elsevier, vol. 70(1), pages 225-233, February.
- Stephane Straub, 2004.
"Informal Sector: The Credit Market Channel,"
ESE Discussion Papers
101, Edinburgh School of Economics, University of Edinburgh.
- Burgess, Robin & Stern, Nicholas, 1993. "Taxation and Development," Journal of Economic Literature, American Economic Association, vol. 31(2), pages 762-830, June.
When requesting a correction, please mention this item's handle: RePEc:taf:jpolrf:v:8:y:2005:i:2:p:153-174. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.