Tax Evasion in a Dynamic General Equilibrium Model

32 Pages Posted: 7 Apr 2020

See all articles by Ratbek Dzhumashev

Ratbek Dzhumashev

Monash University - Department of Economics

Rosella Levaggi

University of Brescia - Department of Economics and Management

Francesco Menoncin

University of Brescia

Date Written: March 16, 2020

Abstract

We model tax evasion in the context of an endogenous growth model with two actors: a private agent and the government. The private agent invests his/her endowment of physical capital in the production of a private good. The income derived is used for consumption activities and to finance a public good that improves the productivity of private investments. However, due to fiscal illusion, the private agent may decide to under-report income for tax purposes. The government is benevolent, wants to maximize long run growth and uses a public agency to collect tax revenues and to audit consumers. Tax administration chooses audit frequency and fines in order to maximise the expected tax revenue, given the institutional parameters. In this setting, we study the long term properties of tax evasion; in particular 1) how tax evasion affects the equilibrium outcomes for the economy; 2) what are the important conditions that lead to self-perpetuating tax evasion. We show that the cost incurred by private agents to evade and audit efficiency have a fundamental role in determining these relationship. When private costs are sufficiently high an increase in the tax rate leads to a decrease in the tax revenue. On the other hand, when these expenditure are sufficiently low tax evasion may be reduced by increasing the tax rate. In both cases, public expenditure will be suboptimal in equilibrium.

Keywords: dynamic tax evasion, general equilibrium, growth, corruption, optimal tax and audit policy

JEL Classification: G11, H26, H42

Suggested Citation

Dzhumashev, Ratbek and Levaggi, Rosella and Menoncin, Francesco, Tax Evasion in a Dynamic General Equilibrium Model (March 16, 2020). Available at SSRN: https://ssrn.com/abstract=3554918 or http://dx.doi.org/10.2139/ssrn.3554918

Ratbek Dzhumashev (Contact Author)

Monash University - Department of Economics ( email )

Wellington Road
Clayton, Victoria 3
Australia

Rosella Levaggi

University of Brescia - Department of Economics and Management ( email )

Via San Faustino 74B
Brescia, 25122
Italy
+39 03 0298 8825 (Phone)
+39 03 0298 8837 (Fax)

HOME PAGE: http://www.eco.unibs.it/segdse/rlev/index.htm

Francesco Menoncin

University of Brescia ( email )

Piazza del Mercato, 15
25122 Brescia
Italy

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