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Laffer Curves in Brazil: The Tax Evasion Effect

Author

Listed:
  • Frederico Alencar

    (CAEN - Graduate Studies in Economics, Federal University of Ceara, Brazil)

  • Marcus Araripe

    (CAEN - Graduate Studies in Economics, Federal University of Ceara, Brazil)

  • Marcelo Arbex

    (Department of Economics, University of Windsor)

  • Marcio V. Correa

    (CAEN - Graduate Studies in Economics, Federal University of Ceara, Brazil)

Abstract

This paper quantifies the impact of tax evasion on the labor-income Laffer curve in Brazil. We develop a heterogeneous-agent model with incomplete markets, progressive taxation, and imperfect tax enforcement. Beyond the well-known arithmetic and economic effects, the model highlights a novel evasion effect - higher statutory rates induce greater concealment of income and reduce effective tax collections. Calibrated to Brazilian data, the model shows that the aggregate Laffer curve peaks at a marginal rate of 25.3%, below the current 27.5%. Tax evasion reduces potential revenue by up to 54% (3.1% of GDP), with losses concentrated among high-income households. A disaggregated analysis further reveals heterogeneous responses across income groups, underscoring distributional and policy implications.

Suggested Citation

  • Frederico Alencar & Marcus Araripe & Marcelo Arbex & Marcio V. Correa, 2025. "Laffer Curves in Brazil: The Tax Evasion Effect," Working Papers 2505, University of Windsor, Department of Economics.
    • Handle: RePEc:wis:wpaper:2505
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    File URL: http://web2.uwindsor.ca/economics/RePEc/wis/pdf/2505.pdf
    File Function: First version, 2025
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    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • I10 - Health, Education, and Welfare - - Health - - - General

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