Excise Tax Evasion: A Welfare cum Crime Theoretic Analysis

Arvind Panagariya and A V L Narayana

Public Finance = Finances publiques, 1988, vol. 43, issue 2, 248-60

Abstract: Drawing upon the literature on illegal activities, especially J. N. Bhagwati and B. Hansen (1973), a simple model of excise-tax evasion is presented. The authors take explicit account of the risk and uncertainty associated with an illegal act. Firms choose the camouflaging costs optimally. In a small, open economy, as well as closed economy models, it is shown that the presence of tax evasion is welfare reducing. A more strict enforcement policy leads to an improvement in welfare, while increases in penalties have ambiguous welfare effects. The latter result obtains due to the fact that higher penalties result in higher proportionate expenditures on camouflaging illegal activities.

Date: 1988
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Persistent link: https://EconPapers.repec.org/RePEc:pfi:pubfin:v:43:y:1988:i:2:p:248-60

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