Steady State Laffer Curve with the Underground Economy

Government of the Italian Republic (Italy), Ministry of Economy and Finance, Department of the Treasury Working Paper No.8

23 Pages Posted: 23 Jan 2013

See all articles by Francesco Busato

Francesco Busato

University of Naples Parthenope

Bruno Chiarini

University of Naples, Parthenope

Date Written: July 30, 2012

Abstract

This paper studies equilibrium effects of fiscal policy within a dynamic general equilibrium model where tax evasion and underground activities are explicitly incorporated.

In particular, we show that a dynamic general equilibrium with tax evasion may give a rational justification for a variant of the Laffer curve for a plausible parameterization.

In this respect, the paper also identifies the different parameterization of the model formulation with tax evasion under which a Laffer curve exist. From a revenue maximizing perspective, the key policy messages are that bringing taxpayers to compliance would be better than announcing to punish them if convicted, and that an economy without problems of compliance is much more sensitive to myopic behavior.

Keywords: Two-Sector Dynamic General Equilibrium Models, Fiscal Policy, Tax Evasion and Underground Activities

JEL Classification: E320, E13, H200, E260

Suggested Citation

Busato, Francesco and Chiarini, Bruno, Steady State Laffer Curve with the Underground Economy (July 30, 2012). Government of the Italian Republic (Italy), Ministry of Economy and Finance, Department of the Treasury Working Paper No.8 , Available at SSRN: https://ssrn.com/abstract=2205039

Francesco Busato

University of Naples Parthenope ( email )

Via Medina 40
Via Generale Parisi, 13
Naples, 80133
Italy

Bruno Chiarini (Contact Author)

University of Naples, Parthenope ( email )

Via Generale Parisi 13
Napoli, 80133
Italy

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