Indeterminacy, Underground Activities and Tax Evasion
University of Aarhus Working Paper No. 2004-12
32 Pages Posted: 18 Jun 2008
There are 2 versions of this paper
Indeterminacy, Underground Activities and Tax Evasion
Date Written: November 22, 2004
Abstract
This paper introduces underground activities and tax evasion into a one sector dynamic general equilibrium model with external effects. The model presents a novel mechanism driving the self-fulfilling prophecies, which is triggered by the reallocation of resources to the underground sector to avoid the excess tax burden. This mechanism differs from the customary one, and it is complementary to it. In addition, the explicit introduction of an (even tiny) underground sector allows to reduce the aggregate degree of increasing returns required for indeterminacy, and for having well behaved input demand schedules (in the sense they slope down).
Keywords: Dynamic General Equilibrium Models, Fiscal Policy, Tax Evasion and Underground Activities, Sunspots
JEL Classification: E320, E13, E260, O40
Suggested Citation: Suggested Citation
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