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Aggregate Effects of Imperfect Tax
Enforcement [PDF}
(Abstract)
In this paper I study an economy in which the government is not able to
perfectly enforce tax compliance among operating firms and compare it
with one in which perfect enforcement is attainable. I develop a
competitive general equilibrium model where imperfect tax enforcement
may affect aggregate outcomes through two mechanisms. First, it may
distort firms' optimal output level as long as the probability of
avoiding tax compliance is related to the firm's
size. Second, poor tax enforcement may lead to a low provision of the
public goods that complement firms' productivity. The results for a
calibrated version of the model suggest that in economies with tax
enforcement problems aggregate output might be reduced by 12%. I
also conclude that sizeable aggregate effects can be obtained only when
the public goods mechanism is at work. |