Tax Rates, Tax Evasion, and Growth in a Multi-period Economy

Jordi Caballe (jordi.caballe@uab.es) and Judith Panadés (judith.panades@uab.es)

Hacienda Pública Española / Review of Public Economics, 2007, vol. 183, issue 4, 67-80

Abstract: We extend the basic tax evasion model to a multi-period economy exhibiting sustained growth. When individuals conceal part of their true income from the tax authority, they face the risk of being audited and hence of paying the corresponding fine. Both taxes and fines determine individual saving and the rate of capital accumulation. We show that, if the penalty imposed on tax evaders is proportional to the amount of evaded taxes, then the growth rate is decreasing in the tax rate. However, the relationship between growth and tax rate becomes non-monotonic when the penalty rate is imposed on the amount of evaded income.

Keywords: Tax evasion; Growth (search for similar items in EconPapers)
JEL-codes: E62 H26 O41 (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (4)

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