Equilibrium Implications of Fiscal Policy with Tax Evasion
Posted: 23 Jun 2008
Date Written: March 23, 2004
This paper studies equilibrium effects of fiscal policy disturbances within a dynamic general equilibrium model where tax evasion and underground activities are explicitly incorporated. There are three main results. (i) The underground sector mitigates the distortionary impact of fiscal policies, while lessening the drop (and the rise) of aggregate production after restrictive (expansionary) tax shocks. (ii) Tax evasion and underground economy can rationalize expansionary response to contractionary fiscal policies; (iii) A dynamic general equilibrium with tax evasion gives a rational justification for a variant of the Laffer curve.
Keywords: Two-sector Dynamic General Equilibrium Models, Fiscal Policy, Tax Evasion and Underground Activities
JEL Classification: E320, E13, H200, E260
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