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Tax Evasion and Optimal Corporate Income Tax Rates in a Growing Economy

Author

Listed:
  • Takeo Hori

    () (Department of Industrial Engineering and Economics, Tokyo Institute of Technology)

  • Noritaka Maebayashi

    () (Faculty of Economics and Business Aminstration, The University of Kitakyushu)

  • Keiichi Morimoto

    () (Department of Economics, Meisei University)

Abstract

We explore how tax evasion by firms affects the growth- and welfare-maximizing rates of corporate income tax (CIT) in an endogenous growth model with productive public service. We show that the negative effect of CIT on growth is mitigated in the presence of tax evasion. This increases the benefit of raising the CIT rate for public service provision. Thus, in contrast to Barro (1990), the optimal tax rate is higher than the output elasticity of public service. Through numerical exercises, we demonstrate that the role of tax evasion by firms is quantitatively significant.

Suggested Citation

  • Takeo Hori & Noritaka Maebayashi & Keiichi Morimoto, 2018. "Tax Evasion and Optimal Corporate Income Tax Rates in a Growing Economy," Discussion Papers 41, Meisei University, School of Economics.
  • Handle: RePEc:mei:wpaper:41
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    References listed on IDEAS

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    Keywords

    corporate income tax; tax evasion; growth; welfare;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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