Fiscal consolidation with tax evasion and corruption

Abstract

Article available under the terms of the CC-BY-NC-ND licence (https://creativecommons.org/licenses/by-nc-nd/4.0/) eprints@whiterose.ac.uk https://eprints.whiterose.ac.uk/ Reuse Unless indicated otherwise, fulltext items are protected by copyright with all rights reserved. The copyright exception in section 29 of the Copyright, Designs and Patents Act 1988 allows the making of a single copy solely for the purpose of non-commercial research or private study within the limits of fair dealing. The publisher or other rights-holder may allow further reproduction and re-use of this version -refer to the White Rose Research Online record for this item. Where records identify the publisher as the copyright holder, users can verify any specific terms of use on the publisher's website. TakedownIf you consider content in White Rose Research Online to be in breach of UK law, please notify us by emailing eprints@whiterose.ac.uk including the URL of the record and the reason for the withdrawal request. Fiscal Consolidation with Tax Evasion and CorruptionEvi Pappa a,1, * , Rana Sajedi a,2 , Eugenia Vella a,3 a European University Institute, Florence, Italy, 50133 AbstractCross-country evidence highlights the importance of tax evasion and corruption in determining the size of fiscal multipliers. We introduce these two features in a New Keynesian model and revisit the effects of fiscal consolidations. VAR evidence for Italy suggests that spending cuts reduce tax evasion, while tax hikes increase it. In the model, spending cuts induce a reallocation of production towards the formal sector, thus reducing tax evasion.Tax hikes increase the incentives to produce in the less productive shadow sector, implying higher output and unemployment losses. Corruption further amplifies these losses by requiring larger hikes in taxes to reduce debt. We use the model to assess the recent fiscal consolidation plans in Greece, Italy, Portugal and Spain. Our results corroborate the evidence of increasing levels of tax evasion during these consolidations and point to significant output and welfare losses, which could be reduced substantially by combating tax evasion and corruption.

Fiscal Consolidation Programs and Income Inequality

“…The conclusions in Alesina et al (2015b) support previous studies, emphasizing that tax-based consolidations produce deeper and longer recessions than spending based ones. Pappa et al (2015) study the impact of fiscal consolidation episodes in an environment with corruption and tax evasion, and find evidence that fiscal consolidation causes large output and welfare losses. They find that much of the welfare loss is due to increases in taxes, which creates the incentives to produce in the less productive shadow sector.…”

The Impact of Taxes on the Consumption to Income Ratio

“…Pappa, Sajedi and Vella concluded that output drops in Portugal were presumably caused by the tax-based consolidation package (Pappa et al 2015). Erceg and Linde presented supporting conclusions for expenditure cuts, but pointed out that this may not be true for the economy, which is constrained by the currency union membership (Erceg and Linde 2013).…”

Determinants of the Shadow Economy in the Czech Regions: A Region-Level Study

“…These methods include the structural equation model (SEM) and the dynamic stochastic general equilibrium (DSGE) model. The former examines statistical links between observed and unobserved variables (see, for example, Frey and Weck-Hanneman (1984), Buehn (2011), Wiseman (2013), whereas the latter is based on the rational behavior of agents (see, for example, Orsi et al (2014), Argentiero and Bollino (2015), Pappa et al (2015), or Annicchiarico and Cesaroni (2016)). …”