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Misalignment in the Growth-Maximizing Policies under Alternative Assumptions of Tax Evasion

Rangan Gupta () and Emmanuel Ziramba

No 200819, Working Papers from University of Pretoria, Department of Economics

Abstract: Using an overlapping generations monetary endogenous growth model, we analyze the possible misalignment in the growth-maximizing policies if tax evasion is assumed to be exogenous instead of being treated as a behavioral decision of the agents. By allowing for government transfers to affect young-age income, and, hence, a role for monetary policy, besides fiscal policy, in the determination of the agents reported income, we show that the failure on part of the government to realize tax evasion as endogenous, results in higher tax rates, reserve requirements and money growth rate. This, in turn, implies that the economy would end up experiencing lower (higher) steady-state growth (inflation).

Keywords: Tax Evasion; Monetary Overlapping Generations Model; Endogenous Growth; Growth-Maximizing Policies (search for similar items in EconPapers)
JEL-codes: E26 E6 E26 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2008-06
New Economics Papers: this item is included in nep-dge, nep-mac and nep-pbe
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