Sovereign default and imperfect tax enforcement

Francesco Pappadà and Yanos Zylberberg

Bristol Economics Discussion Papers from School of Economics, University of Bristol, UK

Abstract: We show that, in many countries, tax compliance is volatile and markedly responds to fiscal policy. To explore the consequence of this novel stylized fact, we build a model of sovereign debt with limited commitment and imperfect tax enforcement. Fiscal policy persistently affects the size of the informal economy, which impact future fiscal revenues and thus default risk. Thismechanism captures one key empirical regularity of economies with imperfect tax enforcement: the low sensitivity of debt price to fiscal consolidations. The interaction of imperfect tax enforcement and limited commitment strongly constrains the dynamics of optimal scal policy. During default crises, high tax distortions force the government towards extreme scal policies, notably including costly austerity spells.

Keywords: China; productivity. (search for similar items in EconPapers)
Date: 2019-05-29
New Economics Papers: this item is included in nep-dge, nep-iue, nep-mac, nep-opm and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Sovereign default and imperfect tax enforcement (2021)
Working Paper: Sovereign Default and Imperfect Tax Enforcement (2019)
Working Paper: Sovereign Default and Imperfect Tax Enforcement (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:bri:uobdis:19/714

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