Dynamic Tax Evasion and Capital Misallocation in General Equilibrium

Francesco Menoncin (francesco.menoncin@qunibs.it), Andrea Modena (andrea.modena@uni-mannheim.de) and Luca Regis (luca.regis@unito.it)

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: We study tax evasion in a dynamic macroeconomic model where utility-maximizing entrepreneurs use capital to produce or buy bonds, depending on their firm’s stochastic productivity. The government provides productivity-enhancing public goods financed through taxes and bond issuance. Entrepreneurs can increase their income by evading taxes at the risk of being audited and fined. Lower productivity boosts evasion incentives, exacerbating capital misallocation because unproductive entrepreneurs accumulate wealth at their peers’ expense. Consistently with OECD data, the model predicts a negative relation between tax evasion and productivity in the aggregate but heterogeneous signs and magnitudes across productivities. Public goods provision affects these outcomes ambiguously.

Keywords: dynamic tax evasion; financial frictions; general equilibrium; misallocation (search for similar items in EconPapers)
JEL-codes: E25 E26 H23 H26 (search for similar items in EconPapers)
Pages: 49
Date: 2023-08
New Economics Papers: this item is included in nep-dge, nep-iue, nep-pbe, nep-pub and nep-upt
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