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Tax Evasion, Technology Shocks, and the Cyclicality of Government Revenues

Jordi Caballe () and Judith Panadés ()

UFAE and IAE Working Papers from Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC)

Abstract: This paper analyzes the behavior of the tax revenue to output ratio over the busi- ness cycle. In order to replicate the empirical evidence, we develop a simple model combining the standard Ak growth model with the tax evasion phenomenon. When individuals conceal part of their true income from the tax authority, they face the risk of being audited and hence of paying the corresponding fine. Under the empiri- cally plausible assumptions that the intertemporal elasticity of substitution exhibits a sufficiently small value and that productivity shocks are serially correlated, we show that the elasticity of government revenue with respect to output is larger than one, which agrees with the empirical evidence. This result holds even if the tax system displays flat tax rates. We extend the previous setup to generate larger fiscal deficits when the economy experiences a recession.

Keywords: Tax evasion; Technology shocks; Growth (search for similar items in EconPapers)
JEL-codes: H23 H26 O41 (search for similar items in EconPapers)
Pages: 21
Date: 2011-04-06
New Economics Papers: this item is included in nep-acc, nep-dge, nep-pbe and nep-pub
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Related works:
Working Paper: Tax Evasion, Technology Shocks, and the Cyclicality of Government Revenues (2011) Downloads
Working Paper: Tax Evasion, Technology Shocks and the Cyclicality of Government Revenues (2009) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:aub:autbar:870.11

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