Tax Evasion and the Allocation of Capital
33 Pages Posted: 17 Jul 2000 Last revised: 21 Jul 2010
Date Written: December 1993
The efficiency cost of capital misallocations between the corporate sector and the noncorporate sector is typically measured using statutory tax differences. Corporate-source income tax compliance is high because of third party reporting, however, while noncorporate rental income tax compliance is low. Differential evasion thus exacerbates statutory differences and enlarges the efficiency cost. To measure this effect, we build a numerical general equilibrium model where households simultaneously choose portfolios of risky assets and fractions of income to report.
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By Frank Cowell