Tax Evasion, Technology Shocks and the Cyclicality of Government Revenues
This working paper analyzes the behavior of tax revenue (the ratio of tax revenue to gross domestic product [GDP]) throughout the business cycle. In order to replicate empirical evidence, we develop a simple model combining the standard Ak growth model with the tax evasion phenomenon. 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. In this setup, the effect of a positive technological shock on the government revenue to output ratio is fully characterized by the value of intertemporal elasticity of substitution (IES). In particular, under the empirically plausible assumption that the IES exhibits a sufficiently small value, we show that the elasticity of government revenue with respect to output is larger than one, which agrees with the empirical evidence
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- Talvi, Ernesto & Vegh, Carlos A., 2005. "Tax base variability and procyclical fiscal policy in developing countries," Journal of Development Economics, Elsevier, vol. 78(1), pages 156-190, October.
- Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Végh, 2005.
"When It Rains, It Pours: Procyclical Capital Flows and Macroeconomic Policies,"
in: NBER Macroeconomics Annual 2004, Volume 19, pages 11-82
National Bureau of Economic Research, Inc.
- Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Vegh, 2004. "When it Rains, it Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Working Papers 10780, National Bureau of Economic Research, Inc.
- Reinhart, Carmen & Kaminsky, Graciela & Vegh, Carlos, 2004. "When it rains, it pours: Procyclical capital flows and macroeconomic policies," MPRA Paper 13883, University Library of Munich, Germany.
- Donald Bruce & William F. Fox & M.H. Tuttle, 2006. "Tax Base Elasticities: A Multi-State Analysis of Long-Run and Short-Run Dynamics," Southern Economic Journal, Southern Economic Association, vol. 73(2), pages 315–341, October.
- Gabriela Inchauste & Bernardin Akitoby & Benedict J. Clements & Sanjeev Gupta, 2004. "The Cyclical and Long-Term Behavior of Government Expenditures in Developing Countries," IMF Working Papers 04/202, International Monetary Fund.
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