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Misalignment in the Growth-Maximizing Policies under Alternative Assumptions of Tax Evasion

Author

Listed:
  • Rangan Gupta

    (Department of Economics, University of Pretoria)

  • Emmanuel Ziramba

    (Department of Economics, University of South Africa)

Abstract

Using an overlapping generations monetary endogenous growth model, we analyze the possible misalignment in the growth-maximizing policies if tax evasion is assumed to be exogenous instead of being treated as a behavioral decision of the agents. By allowing for government transfers to affect young-age income, and, hence, a role for monetary policy, besides fiscal policy, in the determination of the agents reported income, we show that the failure on part of the government to realize tax evasion as endogenous, results in higher tax rates, reserve requirements and money growth rate. This, in turn, implies that the economy would end up experiencing lower (higher) steady-state growth (inflation).

Suggested Citation

  • Rangan Gupta & Emmanuel Ziramba, 2008. "Misalignment in the Growth-Maximizing Policies under Alternative Assumptions of Tax Evasion," Working Papers 200819, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:200819
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    Cited by:

    1. Bittencourt, Manoel & Gupta, Rangan & Stander, Lardo, 2014. "Tax evasion, financial development and inflation: Theory and empirical evidence," Journal of Banking & Finance, Elsevier, vol. 41(C), pages 194-208.

    More about this item

    Keywords

    Tax Evasion; Monetary Overlapping Generations Model; Endogenous Growth; Growth-Maximizing Policies;
    All these keywords.

    JEL classification:

    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy

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