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Tax Evasion, Human Capital, and Productivity Induced Tax Rate Reduction

  • Max Gillman

    ()

    (Department of Economics, University of Missouri-St. Louis)

  • Michal Kejak

The paper shows a key role of human capital in explaining how US postwar growth and welfare could have increased while tax rates declined. As in evidence, we assume that the share of government revenue in output has remained stable and model tax evasion within an endogenous growth model with human capital. A trend upwards in the productivity of the goods or human capital sectors gradually decreases the degree of tax evasion, and causes a trend upwards in time spent in human capital accumulation. These productivity increases also increase the ratio of tax revenue to GDP at any given tax rate such that the tax rate must be reduced in order to be consistent with the stylized fact of a constant share of government revenue in output. Based on estimated US postwar goods and human capital sectoral productivities, the model explains 30% of the actual decline in a weighted average of postwar US top marginal personal and corporate tax rates. The estimated joint sectoral productivity increases are asymmetric with a larger relative increase in the human capital investment sector, a result related to McGrattan and Prescott’s (2010) relatively larger increase in the productivity of the sector producing intangible capital relative to the goods sector. We show that in a special case of exogenous growth without human capital investment, the explanatory power of the tax trend drops significantly.

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File URL: http://www.umsl.edu/~econ/Research/msl/workng/MaxGillmanTaxEvasionpaper.pdf
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Paper provided by University of Missouri-St. Louis, Department of Economics in its series Working Papers with number 1001.

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Length: 36 pages
Date of creation: Nov 2013
Date of revision:
Handle: RePEc:msl:workng:1001
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