Steady State Laffer Curve with the Underground Economy

Department of Economic Studies, University of Naples Discussion Paper No. 2/2009

22 Pages Posted: 6 Oct 2009

See all articles by Francesco Busato

Francesco Busato

Aarhus University - School of Business and Social Sciences

Bruno Chiarini

University of Naples, Parthenope

Date Written: September 1, 2009

Abstract

This paper studies equilibrium effects of fiscal policy within a dynamic general equilibrium model where tax evasion and underground activities are explicitly incorporated. In particular, we show that a dynamic general equilibrium with tax evasion may give a rational justification for a variant of the Laffer curve for a plausible parameterization. In this respect, the paper also identifies the different parameterization of the model formulation with tax evasion under which a Laffer curve exist. From a revenue maximizing perspective, the key policy messages are that bringing tax payers to compliance would be better than announcing to punish them if convicted, and that an economy without problems of compliance is much more sensitive to myopic behavior.

Keywords: two-sector DGEM models, fiscal policy, tax evasion, underground activities

JEL Classification: E32, E13, H2, E26

Suggested Citation

Busato, Francesco and Chiarini, Bruno, Steady State Laffer Curve with the Underground Economy (September 1, 2009). Department of Economic Studies, University of Naples Discussion Paper No. 2/2009, Available at SSRN: https://ssrn.com/abstract=1481324 or http://dx.doi.org/10.2139/ssrn.1481324

Francesco Busato

Aarhus University - School of Business and Social Sciences ( email )

Building 350
DK-8000 Aarhus C
Denmark
+45 8942 1133 (Phone)
+45 8613 6334 (Fax)

HOME PAGE: http://www.econ.au.dk/afn

Bruno Chiarini (Contact Author)

University of Naples, Parthenope ( email )

Via Generale Parisi 13
Napoli, 80133
Italy

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