Wednesday, November 9, 2022 - 14:00 in V10-122
Dynamic Tax Evasion and Capital Misallocation in General Equilibrium
A talk in the Mathematical finance / Insurance mathematics series by
Andrea Modena from University of Mannheim
| Abstract: |
We study tax evasion in a tractable macroeconomic model with productive public expenditure financed by a fixed-rate income tax. Taxpayers are heterogeneous in their productivity and subject to borrowing constraints. They can lower their fiscal burden by evading taxes at the risk of being audited (and fined) by the government. We solve the model for its competitive equilibrium and characterize entrepreneurs’ optimal policies contingent on their individual productivity and endogenous price levels. The model predicts that enforcing tax compliance stimulates the productivity of public expenditure, thus making less productive enterprises viable. At the same time, however, fewer evasion opportunities alleviate borrowing constraints by offsetting the advantage of low-productivity (and highly evasive) entrepreneurs, thereby reallocating capital to more productive users. On the demand side, decreasing tax evasion reduces consumption levels by curbing private capital accumulation. However, it fosters consumption rates by mitigating entrepreneurs’ precautionary motif against auditing risk.
Within the CRC this talk is associated to the project(s): C4 |
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