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Tax Evasion as Contingent Debt

Author

Listed:
  • Christos Kotsogiannis

    (Tax Administration Research Centre (TARC)
    University of Exeter)

  • Xavier Mateos-Planas

    (Centre for Macroeconomics (CFM)
    Queen Mary University of London)

Abstract

This paper studies income-tax evasion in a quantitative incomplete-markets setting with heterogeneous agents. A central aspect is that, realistically, evaded taxes are a form of contingent debt. Since evasion becomes part of a portfolio decision, risk and credit considerations play a central part in shaping it. The model calibrated to match estimated average levels of evasion does a good job in producing observed cross-sectional average evasion rates that decline with age and with earnings. The model also delivers implications for how evasion varies in the cross sectional distribution of wealth and tax arrears. Evasion has substantial effects on macroeconomic variables and welfare, and agent heterogeneity and general equilibrium are very important elements in the explanation. The analysis also considers the response of evasion to a flat-tax policy reform. In spite of the direct incentives to evade less under a flat tax rate, the reform causes households to save more, rendering the change in overall evasion modest.

Suggested Citation

  • Christos Kotsogiannis & Xavier Mateos-Planas, 2019. "Tax Evasion as Contingent Debt," Discussion Papers 1903, Centre for Macroeconomics (CFM).
  • Handle: RePEc:cfm:wpaper:1903
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    3. Stephen G. Dimmock & William C. Gerken & Tyson Van Alfen, 2021. "Real Estate Shocks and Financial Advisor Misconduct," Journal of Finance, American Finance Association, vol. 76(6), pages 3309-3346, December.

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    More about this item

    Keywords

    Tax evasion; Contingent debt; Incomplete markets with heterogeneous agents; Portfolio choice; Risk sharing; Tax progressivity;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents

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