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Tax Evasion, Tax Policies and the Role Played by Financial Markets

Shalini Mitra ()

MPRA Paper from University Library of Munich, Germany

Abstract: In a dynamic general equilibrium model with credit constraints and heterogeneous firms I show that both tax policies and domestic financial market development (FD) can lead to lower informality. Tax policies are more effective in reducing informality since they directly increase the cost of informal production but they have limits, trade-offs and costly general equilibrium effects. FD lowers formal borrowing costs which increases the marginal benefit of hiring in the formal sector. Wage rate increases driving down informal production. Formal output, employment, tax revenue and welfare all increase with FD and counter or offset the negative effects of tax policies.

Keywords: Informal sector; tax policies; heterogenous firms; financial frictions (search for similar items in EconPapers)
JEL-codes: D5 D52 H26 O17 (search for similar items in EconPapers)
Date: 2014-09
New Economics Papers: this item is included in nep-dge, nep-iue and nep-pub
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