Tax Evasion as a Disciplinary Mechanism for Fiscal Policy
This paper investigates the desirability of tax evasion as a mechanism for reducing the time-inconsistency problem in fiscal policy. It endogenises the auditing rates and punishment rates and shows that when the government cannot commit to future tax rates, tolerating tax evasion is optimal. The government can, by committing to low auditing and punishment rates, limit the effectiveness of income taxes in the future. Furthermore we seek to establish which types of economies that would rely on evasion as a “disciplinary mechanism.”
KeywordsFiscal Policy Median Voter White Worker Enforcement System Punishment Rate
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