Equilibrium Implications of Fiscal Policy with Tax Evasion

Aarhus University Economics Paper No. 2005-04

29 Pages Posted: 4 May 2006

See all articles by Bruno Chiarini

Bruno Chiarini

University of Naples, Parthenope

Francesco Busato

Aarhus University - School of Business and Social Sciences

Guido Rey

University of Rome III - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: March 7, 2006

Abstract

This paper studies equilibrium effects of fiscal policy within a dynamic general equilibrium model where tax evasion and underground activities are explicitly incorporated. There are three main results. (i) The underground sector mitigates the distortionary impact of fiscal policies, while lessening the drop (rise) of aggregate production after restrictive (expansionary) tax shifts. In this respect, tax evasion and the informal economy offer a channel for insuring income and consumption from distortions generated by fiscal policy. (ii) Tax evasion and underground economy can completely reverse the theoretical predictions of the standard neoclassical growth model and rationalize expansionary responses to contractionary fiscal policies. (iii) A dynamic general equilibrium with tax evasion gives a rational justification for a variant of the Laffer curve.

Keywords: Two-sector Dynamic General Equilibrium Models, Fiscal Policy, Tax Evasion

JEL Classification: E320, E13, H200, E260

Suggested Citation

Chiarini, Bruno and Busato, Francesco and Rey, Guido, Equilibrium Implications of Fiscal Policy with Tax Evasion (March 7, 2006). Aarhus University Economics Paper No. 2005-04, Available at SSRN: https://ssrn.com/abstract=899548 or http://dx.doi.org/10.2139/ssrn.899548

Bruno Chiarini (Contact Author)

University of Naples, Parthenope ( email )

Via Generale Parisi 13
Napoli, 80133
Italy

Francesco Busato

Aarhus University - School of Business and Social Sciences ( email )

Building 350
DK-8000 Aarhus C
Denmark
+45 8942 1133 (Phone)
+45 8613 6334 (Fax)

HOME PAGE: http://www.econ.au.dk/afn

Guido Rey

University of Rome III - Department of Economics ( email )

via Ostiense, 139
Rome, 00154
Italy

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