A Growth Model with Income Tax Evasion: Some Implications for Australia

17 Pages Posted: 1 Jan 2011

See all articles by Ratbek Dzhumashev

Ratbek Dzhumashev

Monash University - Department of Economics

Emin Gahramanov

American University of Sharjah - Department of Economics

Date Written: November 23, 2010

Abstract

We develop an endogenous growth model à la Barro (1990), augmented with income tax evasion. Unlike many traditional rational choice models of tax evasion, the numerical simulations of our model do not produce counter-intuitive results. Further, we show that: (i) accounting for evasion costs (while capturing the full risk associated with the tax evasion process) is important for obtaining realistic relationships between key model variables; (ii) productive government expenditures explicitly affect the economys tax evasion rate; (iii) Barros natural efficiency condition for setting the optimal statutory tax rate holds even in the presence of tax evasion; (iv) given realistic estimates of the public expenditure externality, the average marginal income tax rate in Australia is not too far away from the optimal one; and (v) differences in tax evasion opportunities aggravate inequality over time.

JEL Classification: H26, D91, O41

Suggested Citation

Dzhumashev, Ratbek and Gahramanov, Emin, A Growth Model with Income Tax Evasion: Some Implications for Australia (November 23, 2010). Economic Record, Vol. 86, Issue 275, pp. 620-636, 2010, Available at SSRN: https://ssrn.com/abstract=1733404 or http://dx.doi.org/10.1111/j.1475-4932.2010.00654.x

Ratbek Dzhumashev (Contact Author)

Monash University - Department of Economics ( email )

Wellington Road
Clayton, Victoria 3
Australia

Emin Gahramanov

American University of Sharjah - Department of Economics ( email )

PO Box 26666
Sharjah
United Arab Emirates

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