Template-Type: ReDIF-Paper 1.0
Title: May Tax Evasion Help Control Public Debt?
Author-Name: Rosella Levaggi
Author-Email: rosella.levaggi@unibs.it
Author-Name: Francesco Menoncin
Author-Email: francesco.menoncin@unibs.it
Author-Name: Andrea Modena
Author-Email: andrea.modena@uni-mannheim.de

Classification-JEL: D5, E6, H2
Keywords: Dynamic tax evasion; general equilibrium; public debt.

Abstract: Tolerating tax evasion may increase debt less than an equivalent tax cut. In our
model, utility-maximizing entrepreneurs earn income from risky production technologies
and risk-free bonds. The government uses income taxes and bonds to finance its
expenses. Entrepreneurs can evade taxes at the risk of being audited and fined. Aggregate
tax evasion and debt-to-GDP are positively related in equilibrium. Nevertheless,
reducing effective tax rates by tolerating evasion may generate a lower debt-to-GDP
ratio (but also lower growth) than equivalent debt-financed nominal tax cuts. Policies
are equivalent with log utility.

Note: 
Length: 20
Creation-Date: 2025-01
Revision-Date: 
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp623
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2025_623