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CAN WE TAX THE DESIRE FOR TAX EVASION?

Ratbek Dzhumashev () and Emin Gahramanov ()

No 28/08, Monash Economics Working Papers from Monash University, Department of Economics

Abstract: A static income tax evasion model ?? la Yitzhaki (1974) predicts that an increase in the tax rate causes taxpayers to increase their income declaration. In an important contribution, Lin and Yang (2001) obtained exactly the opposite result by extending the Yitzhaki (1974) model to a dynamic one with Ak(t) production technology. In this paper we show that once the Lin and Yang (2001) model becomes fully compatible with the Yitzhaki's (1974) setting, the negative relationship between taxes and evasion still prevails. We then enrich the dynamic model with a productive public sector, and obtain an ambiguous relationship between taxes and evasion incentives as in Allingham and Sandmo (1972). We also prove that the growth-maximizing share of public expenditures in total output satisfies the natural efficiency condition even in the presence of tax evasion. However, the latter result is not robust to the introduction of the costs associated with income declaration and concealment activities.

Keywords: Tax Evasion; Optimal Taxation; Economic Growth (search for similar items in EconPapers)
JEL-codes: D91 H21 H26 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2008-10-01
New Economics Papers: this item is included in nep-acc, nep-fdg, nep-pbe and nep-pub
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Working Paper: Can we tax the desire for tax evasion? (2008)
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