Entrepreneurship and tax evasion

Rocío Fernández-Bastidas

Economic Modelling, 2023, vol. 128, issue C

Abstract: Business income is systematically underreported and accounts for a sizable share of the US tax gap. This paper examines the importance of tax evasion in the entrepreneurial sector for the effects of tax reforms. I analyze the long-run effects of switching from a progressive income tax to a proportional one in a model with heterogeneous agents and incomplete markets, including an entrepreneurial choice and a tax evasion decision. Explicitly considering tax evasion in this reform implies (i) significantly lower increases in capital accumulation and output and (ii) a less negative impact on wealth concentration. This finding contrasts with the results obtained when abstracting from tax evasion, which implies much higher output and capital responses and a more adverse impact on wealth inequality; thus, accounting for entrepreneurs’ evasion behavior is vital for the quantitative analysis of tax reforms.

Keywords: Tax evasion; Entrepreneurs; Wealth inequality; Progressive income taxation (search for similar items in EconPapers)
JEL-codes: D31 E62 H26 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:128:y:2023:i:c:s0264999323003000

DOI: 10.1016/j.econmod.2023.106488

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