The Aggregate Consequences of Tax Evasion

Alessandro Di Nola, Georgi Kocharkov, Almuth Scholl and Anna-Mariia Tkhir ()
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Anna-Mariia Tkhir: University of Konstanz

No 2018-06, Working Paper Series of the Department of Economics, University of Konstanz from Department of Economics, University of Konstanz

Abstract: There is a sizable overall tax gap in the U.S., albeit tax non-compliance differs sharply across income types. While only small percentages of wages and salaries are underreported, the estimated misreporting rate of self-employment business income is substantial. This paper studies how tax evasion in the self-employment sector affects aggregate outcomes and welfare. We develop a dynamic general equilibrium model with incomplete markets in which heterogeneous agents choose between being a worker or self-employed. Self-employed agents may hide a share of their business income but face the risk of being detected by the tax authority. Our model replicates important quantitative features of the U.S. economy in terms of income, wealth, self-employment, and tax evasion. Our quantitative ndings suggest that tax evasion leads to a larger self-employment sector but it depresses the average size and productivity of self-employed businesses. Tax evasion generates positive aggregate welfare effects because it acts as a subsidy for the self-employed. Workers, however, suffer from substantial welfare losses.

Keywords: Tax evasion; Self-employment; Wealth inequality; Tax policy (search for similar items in EconPapers)
JEL-codes: C63 E62 E65 H24 H25 H26 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2018-07-26
New Economics Papers: this item is included in nep-dge, nep-ent, nep-iue, nep-mac, nep-pbe and nep-pub
References: View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: The Aggregate Consequences of Tax Evasion (2021)
Working Paper: The Aggregate Consequences of Tax Evasion (2018)
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