A general equilibrium model of Value Added Tax evasion: an application to Pakistan

Andrew Feltenstein (), Jorge Martinez-Vazquez (), Biplab Datta () and Sohani Fatehin
Additional contact information
Biplab Datta: Augusta University
Sohani Fatehin: Dickinson College

International Economics and Economic Policy, 2022, vol. 19, issue 3, No 5, 537-556

Abstract: Abstract Value Added Taxes (VAT) constitute a major share of tax revenues in developing countries in which tax evasion is widespread. The literature on VAT evasion, however, is relatively scant. This paper develops a computable general equilibrium framework for analyzing endogenous VAT tax evasion. The analytical framework entails increasing enforcement through greater spending on the enforcement of tax revenue collection. We assume that there is an elasticity that connects the changes in enforcement to actual increases in VAT collection. We apply the model to Pakistan data and show the level of enforcement spending required to achieve certain VAT collection targets. We also examine the short-, medium-, and long-term macroeconomic outlooks, and real consumption distribution across household economic groups associated with higher enforcement spending. We calibrate the model using 2016 as the base year and then run the dynamic model forward for 20 years. We define the implicit VAT rate as that hypothetical statutory rate that, in the absence of evasion, would approximately generate the observed VAT collection. We assume zero additional spending on enforcement in the baseline and estimate two alternative scenarios of VAT revenue target of 8% and 15% of the GDP. The alternative scenarios require increase in enforcement spending by a compounded 46.4% and 322.4%, respectively. We find that the increased enforcement spending enhances the sustainability of the government’s budget deficit without causing a decline in real GDP over the long-term. The interest and inflation rates are also lowered. However, there is a small regressive impact on households’ real consumption.

Keywords: Value Added Tax; Tax evasion; Tax enforcement; Computable general equilibrium; Macroeconomic outlook (search for similar items in EconPapers)
JEL-codes: C68 H26 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s10368-022-00530-z Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: A General Equilibrium Model of Value Added Tax Evasion: An Application to Pakistan (2021)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:iecepo:v:19:y:2022:i:3:d:10.1007_s10368-022-00530-z

Ordering information: This journal article can be ordered from
http://www.springer. ... cs/journal/10368/PS2

DOI: 10.1007/s10368-022-00530-z

Access Statistics for this article

International Economics and Economic Policy is currently edited by Paul J.J. Welfens, Holger C. Wolf, Christian Pierdzioch and Christian Richter

More articles in International Economics and Economic Policy from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().