Tax evasion and optimal government interventions

Salim Ergene

Economics Letters, 2025, vol. 255, issue C

Abstract: This paper studies optimal government interventions to recapitalize corporations under tight financial conditions. The policymaker can finance the recapitalization program through income taxes and an inflation tax on money holdings. However, households operating the labor-intensive production technology can evade their tax obligations. It becomes optimal to impose an inflation tax rather than income taxes to fund interventions as tax evasion grows. Partially monetizing recapitalization raises welfare gains, given that an inflation tax transfers resources from less to more productive sectors. Pecuniary externalities generate scope for macroprudential policies, alleviating the effects of financial shocks.

Keywords: Tax evasion; Recapitalization; Currency mismatch; Depreciation (search for similar items in EconPapers)
JEL-codes: E12 E26 E41 E58 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:255:y:2025:i:c:s0165176525003234

DOI: 10.1016/j.econlet.2025.112486

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