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

Jordi Caballé and Judith Panadés
Authors registered in the RePEc Author Service: Jordi Caballe () and Judith Panadés ()

No 546, Working Papers from Barcelona School of Economics

Abstract: This paper analyzes the behavior of the tax revenue to output ratio over the business 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 empirically 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: growth; technology shocks; Tax evasion (search for similar items in EconPapers)
JEL-codes: H23 H26 O41 (search for similar items in EconPapers)
Date: 2015-09
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Related works:
Working Paper: Tax Evasion, Technology Shocks, and the Cyclicality of Government Revenues (2011)
Working Paper: Tax Evasion, Technology Shocks and the Cyclicality of Government Revenues (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:bge:wpaper:546

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