Tax Evasion as Contingent Debt

Christos Kotsogiannis and Xavier Mateos-Planas ()

No 1903, Discussion Papers from Centre for Macroeconomics (CFM)

Abstract: This paper studies income-tax evasion in a quantitative incomplete-markets setting with heterogeneous agents. A central aspect is that, realistically, evaded taxes are a form of contingent debt. Since evasion becomes part of a portfolio decision, risk and credit considerations play a central part in shaping it. The model calibrated to match estimated average levels of evasion does a good job in producing observed cross-sectional average evasion rates that decline with age and with earnings. The model also delivers implications for how evasion varies in the cross sectional distribution of wealth and tax arrears. Evasion has substantial effects on macroeconomic variables and welfare, and agent heterogeneity and general equilibrium are very important elements in the explanation. The analysis also considers the response of evasion to a flat-tax policy reform. In spite of the direct incentives to evade less under a flat tax rate, the reform causes households to save more, rendering the change in overall evasion modest.

Keywords: Tax evasion; Contingent debt; Incomplete markets with heterogeneous agents; Portfolio choice; Risk sharing; Tax progressivity (search for similar items in EconPapers)
JEL-codes: E2 E62 H3 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2019-01
New Economics Papers: this item is included in nep-dge, nep-iue, nep-mac, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:cfm:wpaper:1903

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