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Can We Tax The Desire For Tax Evasion?

  • Ratbek Dzhumashev
  • Emin Gahramanov

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.

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File URL: http://www.buseco.monash.edu.au/eco/research/papers/2008/2808taxdzhumashevgahramanov.pdf
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Paper provided by Monash University, Department of Economics in its series Monash Economics Working Papers with number 28/08.

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Length: 20 pages
Date of creation: 01 Oct 2008
Date of revision:
Handle: RePEc:mos:moswps:2008-28
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  1. Turnovsky, Stephen J. & Fisher, Walter H., 1995. "The composition of government expenditure and its consequences for macroeconomic performance," Journal of Economic Dynamics and Control, Elsevier, vol. 19(4), pages 747-786, May.
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  3. Gordon, James P. P., 1989. "Individual morality and reputation costs as deterrents to tax evasion," European Economic Review, Elsevier, vol. 33(4), pages 797-805, April.
  4. Lin, Wen-Zhung & Yang, C. C., 2001. "A dynamic portfolio choice model of tax evasion: Comparative statics of tax rates and its implication for economic growth," Journal of Economic Dynamics and Control, Elsevier, vol. 25(11), pages 1827-1840, November.
  5. Slemrod, Joel & Yitzhaki, Shlomo, 2002. "Tax avoidance, evasion, and administration," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 22, pages 1423-1470 Elsevier.
  6. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S103-26, October.
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  16. Sanjit Dhami & Ali al-Nowaihi, 2005. "Why Do People Pay Taxes? Prospect Theory Versus Expected Utility Theory," Discussion Papers in Economics 05/23, Department of Economics, University of Leicester, revised Aug 2006.
  17. Aschauer, David Alan, 1989. "Is public expenditure productive?," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 177-200, March.
  18. Glomm, Gerhard & Ravikumar, B., 1999. "Competitive equilibrium and public investment plans," Journal of Economic Dynamics and Control, Elsevier, vol. 23(8), pages 1207-1224, August.
  19. Yaniv, Gideon, 1999. "Tax Compliance and Advance Tax Payments: A Prospect Theory Analysis," National Tax Journal, National Tax Association, vol. 52(n. 4), pages 753-64, December.
  20. Rangan Gupta, 2005. "Endogenous Tax Evasion and Reserve Requirements: A Comparative Study in the Context of European Economies," Computing in Economics and Finance 2005 328, Society for Computational Economics.
  21. Been-Lon Chen, 2003. "Tax Evasion in a Model of Endogenous Growth," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(2), pages 381-403, April.
  22. Cremer, Helmuth & Gahvari, Firouz, 1994. " Tax Evasion, Concealment and the Optimal Linear Income Tax," Scandinavian Journal of Economics, Wiley Blackwell, vol. 96(2), pages 219-39.
  23. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 323-338, November.
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