Munich Personal RePEc Archive

Tax Evasion, Tax Policies and the Role Played by Financial Markets.

Mitra, Shalini (2014): Tax Evasion, Tax Policies and the Role Played by Financial Markets.

[img]
Preview
PDF
MPRA_paper_58977.pdf

Download (337kB) | Preview

Abstract

In a dynamic general equilibrium model with credit constraints and heterogeneous firms I show that both tax policies and domestic financial market development (FD) can lead to lower informality. Tax policies are more effective in reducing informality since they directly increase the cost of informal production but they have limits, trade-offs and costly general equilibrium effects. FD lowers formal borrowing costs which increases the marginal benefit of hiring in the formal sector. Wage rate increases driving down informal production. Formal output, employment, tax revenue and welfare all increase with FD and counter or offset the negative effects of tax policies.

UB_LMU-Logo
MPRA is a RePEc service hosted by
the Munich University Library in Germany.