Tax Evasion and Optimal Corporate Income Tax Rates in a Growing Economy

Hori, Takeo and Maebayashi, Noritaka and Morimoto, Keiichi (2018): Tax Evasion and Optimal Corporate Income Tax Rates in a Growing Economy.

Abstract

We explore how tax evasion by firms affects the growth- and welfare-maximizing rates of corporate income tax (CIT) in an endogenous growth model with productive public service. We show that the negative effect of CIT on growth is mitigated in the presence of tax evasion. This increases the benefit of raising the CIT rate for public service provision. Thus, in contrast to Barro (1990), the optimal tax rate is higher than the output elasticity of public service. Through numerical exercises, we demonstrate that the role of tax evasion by firms is quantitatively significant.

• Item Type: MPRA Paper
• Language: English
• Keywords: corporate income tax, tax evasion, growth, welfare
• Subjects: H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H21 - Efficiency ; Optimal Taxation; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H26 - Tax Evasion and Avoidance; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O40 - General

References

[1] Abiad, A., Furceri, D., and Topalova, P. (2016) The macroeconomic effect of public investment: evidence from advanced econmics. Journal of Macroeconomics 50, 224–240.

[2] Ag´enor, P.R. (2008) Health and infrastructure in a model of endogenous growth. Journal of Macroeconomics 30, 1407–1422.

[3] Ag´enor, P.R.., and Neanisdis K. C. (2015) Innovation, public capital, and growth. Journal of Macroeconomics 44, 252–275.

[4] Aghion, P., U. Akcigit., J. Cag´e, and W. R. Kerr (2016) Taxation, corruption, and growth. European Economic Review 86, 24–51.

[5] Aghion, P., and P. Howitt (1998) Endogenous Growth Theory, MIT University Press, Cambridge, MA.

[6] Allingham, M., and A. Sandmo (1972) Income tax evasion: a theoretical analysis. Journal of Public Economics 1, 323–338.

[7] Axtell, R. L. (2001) Zipf Distribution of U.S. Firm Sizes. Science 293, 1818–1820.

[8] Barro, R. J. (1990) Government spending in a simple model of endogenous growth. Journal of Political Economy 98, 103–125.

[9] Barro, R. J. and X. Sala-i-Martin (2004) Economic Growth, 2nd edition. Cambridge, MA: MIT Press.

[10] Benassy, J. P. (1998) Is there always too little research in endogenous growth with expanding product variety? European Economic Review 42, 61–69.

[11] Bom, P.R.D., and J.E. Ligthart (2014) What have we learned from three decades of research on the productivity of public capital? Journal of Economic Surveys 28, 889–916.

[12] Calder´on, C., Moral-Benito, E., and Serv´en, L. (2015) Is infrastructure capital productive? a dynamic heterogeneous approach. Journal of Applied Econometrics 30, 177–198.

[13] Chang S.-H., and Chang J.-J. (2015) Optimal government spending in and economy with imperfectly competitive goods and labor markets. Southern Economic Journal 82, 385–407.

[14] Chatterjee, S., and S.J, Turnovsky. (2012) Infrastructure and inequality. European Economic Review 56, 1730–1745.

[15] Chen, B. L. (2003) Tax evasion in a model of endogenous growth. Review of Economic Dynamics 6, 381–403.

[16] Esfahani, H.S., and Ram´ırez, M.T. (2003) Institutions, infrastructure, and economic growth. Journal of Development Economics 70, 443–477.

[17] Fullerton, D. and M. Karayannis (1994) Tax evasion and the allocation of capital. Journal of Public Economics 95, 25–607.

[18] Futagami, K., Y. Morita, and A. Shibata (1993) Dynamic analysis of an endogenous growth model with public capital. Scandinavian Journal of Economics 95, 607–625.

[19] Ghosh, S., and U. Roy (2004) Fiscal policy, long-run growth, and welfare in a stock-flow model of public goods. Canadian Journal of Economics 37, 742–756.

[20] Glomm, G., and B. Ravikumar. (1994) Public investment in infrastructure in a simple growth model. Journal of Economic Dynamics and Control 18,1173–1187.

[21] Internal Revenue Service (2016) Federal Tax Compliance Research: Tax Gap Estimates for Tax Years 2008-2010. Downloadable at https://www.irs.gov/pub/irs-soi/p1415.pdf.

[22] Internal Revenue Service (2017) IRS Data Book 2017, downloadable at https://www.irs.gov/pub/irs-soi/17databk.pdf.

[23] Kafkalas, S., P. Kalaitzidakis, and V. Tzouvelekas (2014) Tax evasion and public expenditures on tax revenue services in an endogenous growth model. European Economic Review 70, 438–453.

[24] Kalaitzidakis, P., and S. Kalyvitis (2004) On the macroeconomic implications of maintenance in public capital. Journal of Public Economics 88, 695–712.

[25] Kamps, C. (2006) New estimates of government net capital stocks for 22 OECD countries, 1960–2001. IMF Staff Papers, 53, 120–150.

[26] Johannesen, N. (2010) Imperfect tax competition for profits, asymmetric equilibrium and beneficial tax havens. Journal of International Economics 81, 253–264.

[27] Jones, L.E., Manuelli, R. and P. Rossi (1993) Optimal taxation in models of endogenous growth. Journal of Political Economy 98, 1008–1038.

[28] National Tax Agency (2016) The 141th National Tax Agency Annual Statistics Report FY 2015. Downloadable at http://www.nta.go.jp/publication/statistics/kokuzeicho/h27/h27.pdf.

[29] National Tax Agency (2017) National Tax Agency Report 2017. Downloadable at https://www.nta.go.jp/english/Report pdf/2017e.pdf.

[30] Peretto, P. F. (2007a) Corporate taxes, growth and welfare in a Schumpeterian economy. Journal of Economic Theory 137, 353–382.

[31] Peretto, P. F. (2007b) Schumpeterian growth with productive public spending and distortionary taxation. Review of Development Economics 11, 699–722.

[32] Romer, P. (1986) Increasing returns and long-run growth. Journal of Political Economy 94, 1002–1037.

[33] R¨oller, L.-H., and Waverman, L. (2001) Telecommunications infrastructure and economic development: A simultaneous approach. American Economic Review 91, 909–923.

[34] Rotemberg, J. andWoodford, M. (1999) Oligopolistic Pricing and the Effects of Aggregate Demand. Journal of Political Economy 100, 1153–1207.

[35] Roubini, N. and Sala-i-Martin, X. (1995) A growth model of inflation, tax evasion, and financial repression. Journal of Monetary Economics 35, 275–301.

[36] Shioji, E. (2000) Public capital and economic growth: A convergence approach. Journal of Economic Growth 6, 205–227.

[37] Turnovsky, S.J. (1997) Fiscal policy in a growing economy with public capital. Macroeconomic Dynamics 1, 615–639.

[38] Young, A. (1998) Growth without scale effects. Journal of Political Economy 106, 41–63.