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Can We Tax The Desire For Tax Evasion?

Author

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  • Ratbek Dzhumashev
  • Emin Gahramanov

Abstract

A static income tax evasion model ?? la Yitzhaki (1974) predicts that an increase in the tax rate causes taxpayers to increase their income declaration. In an important contribution, Lin and Yang (2001) obtained exactly the opposite result by extending the Yitzhaki (1974) model to a dynamic one with Ak(t) production technology. In this paper we show that once the Lin and Yang (2001) model becomes fully compatible with the Yitzhaki's (1974) setting, the negative relationship between taxes and evasion still prevails. We then enrich the dynamic model with a productive public sector, and obtain an ambiguous relationship between taxes and evasion incentives as in Allingham and Sandmo (1972). We also prove that the growth-maximizing share of public expenditures in total output satisfies the natural efficiency condition even in the presence of tax evasion. However, the latter result is not robust to the introduction of the costs associated with income declaration and concealment activities.

Suggested Citation

  • Ratbek Dzhumashev & Emin Gahramanov, 2008. "Can We Tax The Desire For Tax Evasion?," Monash Economics Working Papers 28/08, Monash University, Department of Economics.
  • Handle: RePEc:mos:moswps:2008-28
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    References listed on IDEAS

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    More about this item

    Keywords

    Tax Evasion; Optimal Taxation; Economic Growth;

    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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