Template-Type: ReDIF-Paper 1.0
Title: Dynamic Tax Evasion and Capital Misallocation in General Equilibrium
Author-Name: Francesco Menoncin
Author-Email: francesco.menoncin@qunibs.it
Author-Name: Andrea Modena
Author-Email: andrea.modena@uni-mannheim.de
Author-Name: Luca Regis
Author-Email: luca.regis@unito.it
Classification-JEL: E25, E26, H23, H26
Keywords: dynamic tax evasion, financial frictions, general equilibrium, misallocation

Abstract: We study tax evasion in a dynamic macroeconomic model where utility-maximizing
entrepreneurs use capital to produce or buy bonds, depending on their firm’s stochastic
productivity. The government provides productivity-enhancing public goods financed
through taxes and bond issuance. Entrepreneurs can increase their income by evading 
taxes at the risk of being audited and fined. Lower productivity boosts evasion
incentives, exacerbating capital misallocation because unproductive entrepreneurs 
accumulate wealth at their peers’ expense. Consistently with OECD data, the model
predicts a negative relation between tax evasion and productivity in the aggregate
but heterogeneous signs and magnitudes across productivities. Public goods provision
affects these outcomes ambiguously.


Note: 
Length: 49
Creation-Date: 2023-08
Revision-Date:
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp453
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2023_453