Income Tax Evasion: Tax Elasticity, Welfare, and Revenue

Max Gillman

No 2038, CERS-IE WORKING PAPERS from Institute of Economics, Centre for Economic and Regional Studies

Abstract: This paper provides a general equilibrium model of income tax evasion. As functions of the share of income reported, the paper contributes an analytic derivation of the tax elasticity of taxable income, the welfare cost of the tax, and government revenue as a percent of output. It shows how an increase in the tax rate causes the tax elasticity and welfare cost to increase in magnitude by more than with zero evasion. Keeping constant the ratio of income tax revenue to output, as shown to be consistent with certain US evidence, a rising productivity of the goods sector induces less evasion and thereby allows tax rate reduction. The paper derives conditions for a stable share of income tax revenue in output with dependence upon the tax elasticity of reporting income. Examples are provided with less and more productive economies in terms of the tax elasticity of reported income, the welfare cost of taxation and the tax revenue as a percent of output, with sensitivity analysis with respect to leisure preference and goods productivity. Discussion focuses on how the tax evasion analysis may help explain such fiscal tax policy as the postwar US income tax rate reductions with discussion of tax acts and government fiscal multipliers. Fiscal policy with tax evasion included shows how tax rate reduction induces less tax evasion, a lower welfare cost of taxation, and makes for a stable income tax share of output.

Keywords: Optimal Evasion; Tax Law; Welfare; Tax Elasticity; Revenue; Productivity; Development. (search for similar items in EconPapers)
JEL-codes: E13 H21 H26 H30 H68 K34 K42 O11 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2020-09
New Economics Papers: this item is included in nep-iue, nep-law, nep-mac, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.mtakti.hu/wp-content/uploads/2020/09/CERSIEWP202038.pdf (application/pdf)

Related works:
Journal Article: Income tax evasion: tax elasticity, welfare, and revenue (2021)
Working Paper: Income Tax Evasion: Tax Elasticity, Welfare, and Revenue (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:has:discpr:2038

Access Statistics for this paper

More papers in CERS-IE WORKING PAPERS from Institute of Economics, Centre for Economic and Regional Studies Contact information at EDIRC.
Bibliographic data for series maintained by Nora Horvath ( this e-mail address is bad, please contact ).