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Tax Evasion and Optimal Corporate Income Tax Rates in a Growing Economy

Takeo Hori (), Noritaka Maebayashi () and Keiichi Morimoto ()
Additional contact information
Takeo Hori: Department of Industrial Engineering and Economics, Tokyo Institute of Technology
Noritaka Maebayashi: Faculty of Economics and Business Aminstration, The University of Kitakyushu

No 41, Discussion Papers from Meisei University, School of Economics

Abstract: We explore how tax evasion by firms affects the growth- and welfare-maximizing rates of corporate income tax (CIT) in an endogenous growth model with productive public service. We show that the negative effect of CIT on growth is mitigated in the presence of tax evasion. This increases the benefit of raising the CIT rate for public service provision. Thus, in contrast to Barro (1990), the optimal tax rate is higher than the output elasticity of public service. Through numerical exercises, we demonstrate that the role of tax evasion by firms is quantitatively significant.

Keywords: corporate income tax; tax evasion; growth; welfare (search for similar items in EconPapers)
JEL-codes: H21 H26 O40 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-gro, nep-iue, nep-pbe and nep-pub
Date: 2018-12
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