A Tax Evasion Game in the New Growth Model
Abstract
This paper models the game-theoretic treatment of tax evasion. This model of tax evasion augments the Barro (1990) growth model resulting in 3 propositions: (1) Under the assumptions of tax authorities’ budget constraint and the social norms of evading tax, tax authorities can obtain the revenue-maximizing equilibrium, providing the honest and effective tax-enforcement. Theoretically, the effect of the evasion rate on growth is null because the tax cheaters earn zero expected payoffs under the mixed strategy Nash equilibrium. (2) the cost of audit has a negative impact on the sufficient provision of the public service. A reduction in the public service can decrease capital productivity, capital accumulation and economic growth. (3) the fine rate has a positive impact on the sufficient provision of the public service. An increase in the public service can increase capital productivity, capital accumulation and economic growth.
References
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