Tax Evasion and Government Policy

The effects of government policy that aims to deter tax evasion are examined in a qualitative and quantitative two-sector general equilibrium model. Policy instruments that i) increase disutility from tax evasion and ii) decrease productivity in the tax-evading sector are concluded to decrease tax evasion under specified sufficient assumptions. Counteracting welfare effects are involved. The simulation analysis reveals ambiguous welfare effects for the first and negative welfare effects for the second policy. Tax evasion is also concluded to increase in the tax rate, while a reallocation of government expenditures away from transfers decreases tax evasion.