Tax Evasion and Optimal Government Interventions

Salim Ergene

Working Papers from Research and Monetary Policy Department, Central Bank of the Republic of Turkey

Abstract: This paper studies optimal government interventions to recapitalize corporations under tight financial conditions. The policymaker can finance the recapitalization program through income taxes and an inflation tax on money holdings. However, households operating the labor-intensive production technology can evade their tax obligations. Growing tax evasion raises the tendency to monetize interventions. Partially monetizing recapitalization yields welfare gains, as an inflation tax reallocates resources from less to more productive sectors. However, financing unproductive government spending through seigniorage revenue becomes an inferior policy, as contemporaneous inflation costs outweigh the expansionary effects of fiscal policy. Pecuniary externalities generate scope for macroprudential policies, mitigating the effects of financial shocks.

Keywords: Tax evasion; Recapitalization; Currency mismatch; Depreciation (search for similar items in EconPapers)
JEL-codes: E12 E26 E41 E58 (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in nep-cba, nep-dge and nep-iue
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Persistent link: https://EconPapers.repec.org/RePEc:tcb:wpaper:2507

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