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Optimal fiscal policy in the presence of VAT evasion: the case of Bulgaria

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  • Vasilev, Aleksandar

Abstract

This paper explores the effects of fiscal policy in an economy based on indirect taxes, and in the presence of VAT evasion channel. In addition, the government is taxing all income at the same rate. The focus of the paper to compare and contrast two regimes - the exogenous (observed) vs. optimal (Ramsey) policy case. The results are evaluated in light of consumption vs. income taxation debate, the issue of optimal provision of valuable public services, and the effect of fiscal policy on the size of VAT evasion. To this end, a Real-Business-Cycle model, calibrated to Bulgarian data (1999-2014), is augmented with a government sector. Bulgarian economy was chosen as a case study due to its dependence on consumption taxation as a source of tax revenue, and the prevalence of VAT evasion. The main findings from the computational experiments performed in the paper are: (i) The optimal steady-state income tax rate is zero; (ii) The benevolent Ramsey planner provides the optimal amount of the utility- enhanc- ing public services, which are now three times lower; (iii) The optimal steady-state consumption tax needed to finance the optimal level of government spending is twice lower, as compared to the exogenous policy case.

Suggested Citation

  • Vasilev, Aleksandar, 2016. "Optimal fiscal policy in the presence of VAT evasion: the case of Bulgaria," EconStor Preprints 148049, ZBW - Leibniz Information Centre for Economics.
  • Handle: RePEc:zbw:esprep:148049
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    References listed on IDEAS

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    1. Konstantinos Angelopoulos & George Economides & Vanghelis Vassilatos, 2011. "Do institutions matter for economic fluctuations? Weak property rights in a business cycle model for Mexico," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(3), pages 511-531, July.
    2. Chari, V.V. & Kehoe, Patrick J., 1999. "Optimal fiscal and monetary policy," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 26, pages 1671-1745, Elsevier.
    3. Aleksandar Vasilev, 2017. "On the Cost of Opportunistic Behavior in the Public Sector: A General-Equilibrium Approach," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 19(2), pages 565-582, April.
    4. Aleksandar Vasilev, 2017. "VAT Evasion in Bulgaria: A General-Equilibrium Approach," Review of Economics and Institutions, Università di Perugia, vol. 8(2).
    5. Angelopoulos, Konstantinos & Philippopoulos, Apostolis & Vassilatos, Vanghelis, 2009. "The social cost of rent seeking in Europe," European Journal of Political Economy, Elsevier, vol. 25(3), pages 280-299, September.
    6. Aleksandar Vasilev, 2013. "On the cost of rent-seeking by government bureaucrats in a Real-Business-Cycle framework," Working Papers 2013_20, Business School - Economics, University of Glasgow.
    7. Judd, Kenneth L., 1985. "Redistributive taxation in a simple perfect foresight model," Journal of Public Economics, Elsevier, vol. 28(1), pages 59-83, October.
    8. Zhu, Xiaodong, 1992. "Optimal fiscal policy in a stochastic growth model," Journal of Economic Theory, Elsevier, vol. 58(2), pages 250-289, December.
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    Cited by:

    1. Vasilev, Aleksandar, 2018. "Optimal fiscal policy with environmental tax and abatement spending in a model with pollution and utility-enhancing environmental quality: the case of Bulgaria," EconStor Preprints 175661, ZBW - Leibniz Information Centre for Economics.
    2. Vasilev Aleksandar, 2018. "Optimal Fiscal Policy with Utility-Enhancing Government Spending, Consumption Taxation and a Common Income Tax Rate: The Case of Bulgaria," Review of Economics, De Gruyter, vol. 69(1), pages 1-16, April.
    3. Vasilev, Aleksandar, 2018. "A Real-Business-Cycle model with pollution and environmental taxation: the case of Bulgaria," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, pages 441-451.
    4. Aleksandar Vasilev, 2019. "Optimal fiscal policy with environmental tax and pollution abatement spending in a model with utility-enhancing environmental quality: lessons from Bulgaria," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 12(1), pages 24-35, January.
    5. Aleksandar Vasilev, 2020. "Optimal Fiscal Policy with Epstein–Zin Preferences and Utility-Enhancing Government Services: Lessons from Bulgaria (1999–2016)," Problems of Economic Transition, Taylor & Francis Journals, vol. 62(1-2), pages 133-146, February.

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    More about this item

    Keywords

    consumption tax; income tax; VAT evasion; general equilibrium; fiscal policy; Bulgaria;
    All these keywords.

    JEL classification:

    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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