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The Aggregate Consequences of Tax Evasion

Author

Listed:
  • Alessandro Di Nola

    () (University of Konstanz)

  • Georgi Kocharkov

    () (Goethe University Frankfurt)

  • Almuth Scholl

    () (University of Konstanz)

  • Anna-Mariia Tkhir

    () (University of Konstanz)

Abstract

There is a sizable overall tax gap in the U.S., albeit tax non-compliance differs sharply across income types. While only small percentages of wages and salaries are underreported, the estimated misreporting rate of self-employment business income is substantial. This paper studies how tax evasion in the self-employment sector affects aggregate outcomes and welfare. We develop a dynamic general equilibrium model with incomplete markets in which heterogeneous agents choose between being a worker or self-employed. Self-employed agents may hide a share of their business income but face the risk of being detected by the tax authority. Our model replicates important quantitative features of the U.S. economy in terms of income, wealth, self-employment, and tax evasion. Our quantitative ndings suggest that tax evasion leads to a larger self-employment sector but it depresses the average size and productivity of self-employed businesses. Tax evasion generates positive aggregate welfare effects because it acts as a subsidy for the self-employed. Workers, however, suffer from substantial welfare losses.

Suggested Citation

  • Alessandro Di Nola & Georgi Kocharkov & Almuth Scholl & Anna-Mariia Tkhir, 2018. "The Aggregate Consequences of Tax Evasion," Working Paper Series of the Department of Economics, University of Konstanz 2018-06, Department of Economics, University of Konstanz.
  • Handle: RePEc:knz:dpteco:1806
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    File URL: http://www.uni-konstanz.de/FuF/wiwi/workingpaperseries/WP_06_DiNola_Kocharkov_Scholl_Tkhir_2018.pdf
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. The Aggregate Consequences of Tax Evasion
      by Christian Zimmermann in NEP-DGE blog on 2018-08-03 16:23:38

    More about this item

    Keywords

    Tax evasion; Self-employment; Wealth inequality; Tax policy;

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes

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