Laffer Curves in Brazil: The Tax Evasion Effect

Frederico Alencar (), Marcus Araripe (), Marcelo Arbex () and Marcio V. Correa ()
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Frederico Alencar: CAEN - Graduate Studies in Economics, Federal University of Ceara, Brazil
Marcus Araripe: CAEN - Graduate Studies in Economics, Federal University of Ceara, Brazil
Marcelo Arbex: Department of Economics, University of Windsor
Marcio V. Correa: CAEN - Graduate Studies in Economics, Federal University of Ceara, Brazil

No 2505, Working Papers from University of Windsor, Department of Economics

Abstract: This paper quantifies the impact of tax evasion on the labor-income Laffer curve in Brazil. We develop a heterogeneous-agent model with incomplete markets, progressive taxation, and imperfect tax enforcement. Beyond the well-known arithmetic and economic effects, the model highlights a novel evasion effect - higher statutory rates induce greater concealment of income and reduce effective tax collections. Calibrated to Brazilian data, the model shows that the aggregate Laffer curve peaks at a marginal rate of 25.3%, below the current 27.5%. Tax evasion reduces potential revenue by up to 54% (3.1% of GDP), with losses concentrated among high-income households. A disaggregated analysis further reveals heterogeneous responses across income groups, underscoring distributional and policy implications.

Keywords: Laffer Curve; Tax Evasion; Labor Income Taxation; General Equilibrium. (search for similar items in EconPapers)
JEL-codes: D85 E20 E60 H26 I10 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2025-10
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