May Tax Evasion Help Control Public Debt?

Rosella Levaggi, Francesco Menoncin () and Andrea Modena ()

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: Tolerating tax evasion may increase debt less than an equivalent tax cut. In our model, utility-maximizing entrepreneurs earn income from risky production technologies and risk-free bonds. The government uses income taxes and bonds to finance its expenses. Entrepreneurs can evade taxes at the risk of being audited and fined. Aggregate tax evasion and debt-to-GDP are positively related in equilibrium. Nevertheless, reducing effective tax rates by tolerating evasion may generate a lower debt-to-GDP ratio (but also lower growth) than equivalent debt-financed nominal tax cuts. Policies are equivalent with log utility.

Keywords: Dynamic tax evasion; general equilibrium; public debt. (search for similar items in EconPapers)
JEL-codes: D5 E6 H2 (search for similar items in EconPapers)
Pages: 20
Date: 2025-01
New Economics Papers: this item is included in nep-acc, nep-dge, nep-iue, nep-pbe, nep-pub and nep-upt
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