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Tax Evasion and Optimal Government Interventions

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  • Salim Ergene

Abstract

This paper studies optimal government interventions to recapitalize corporations under tight financial conditions. The policymaker can finance the recapitalization program through income taxes and an inflation tax on money holdings. However, households operating the labor-intensive production technology can evade their tax obligations. Growing tax evasion raises the tendency to monetize interventions. Partially monetizing recapitalization yields welfare gains, as an inflation tax reallocates resources from less to more productive sectors. However, financing unproductive government spending through seigniorage revenue becomes an inferior policy, as contemporaneous inflation costs outweigh the expansionary effects of fiscal policy. Pecuniary externalities generate scope for macroprudential policies, mitigating the effects of financial shocks.

Suggested Citation

  • Salim Ergene, 2025. "Tax Evasion and Optimal Government Interventions," Working Papers 2507, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    • Handle: RePEc:tcb:wpaper:2507
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    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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