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The Aggregate Consequences of Tax Evasion

Alessandro Di Nola, Georgi Kocharkov, Almuth Scholl and Anna-Mariia Tkhir
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Anna-Mariia Tkhir: Goethe University Frankfurt

Review of Economic Dynamics, 2021, vol. 40, 198-227

Abstract: This paper studies how tax evasion in the self-employment sector affects aggregate outcomes and welfare. We develop a dynamic general equilibrium model with incomplete markets in which heterogeneous agents choose between being a worker or self-employed. Self-employed agents may misreport their business income but face the risk of being detected by the tax authorities. Our model replicates important quantitative features of the U.S. economy in terms of income, wealth, self-employment, and misreporting. Tax evasion alleviates credit constraints and leads to a larger self-employment sector but reduces the average size and productivity of self-employed businesses. Tax evasion generates positive welfare effects for the self-employed at the expense of the workers. (Copyright: Elsevier)

Keywords: Tax evasion; Self-employment; Occupational choice; Wealth inequality; Incomplete markets; Heterogeneous agents (search for similar items in EconPapers)
JEL-codes: E21 E62 H26 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/

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