Can tax evasion tame Leviathan governments?

Abstract

This paper asks to what extent institutional features that facilitate tax evasion may keep Leviathan governments at bay. The specific feature we look at is banking secrecy abroad. The analysis draws on a 16-generation OLG model in which tax rates are determined in a repeated game between voters and a rent-seeking Leviathan government. Key insights are: (1) Effects on any generation alive when change takes place may differ substantially from steady-state effects that accrue for generations yet to be born. (2) There is considerable intergenerational diversity in these effects that is not monotonic as we move from young to old. Combined, these results suggest that the political economy of pertinent institutional change may be quite complex.

Tax evasion, tax corruption and stochastic growth

“…This argument in contrast with a widespread literature suggesting a negative link between tax evasion and economic growth, especially in the developing countries (see, for instance, Barreto (2000), Brevik and Gartner (2008), Ehrlich and Lui (1999)). …”

The Culture of Corruption, Tax Evasion, and Economic Growth

“…Some initial evidence that tentatively supports this notion is provided by Mauro's (1995) cross-country study. Mauro's finding, while not conclusive, has served to motivate attempts to explain the negative correlation by introducing corruption into dynamic general equilibrium models (Barreto 2000;Brevik and Gartner 2008;Ehrlich and Lui 1999;James Ellis and Fender 2006;Mauro 2002) as we do in this paper. 4 Our approach is different from this literature because we include both private and public capital and both tax evasion and corruption.…”

“…For example, in the studies by James Ellis and Fender (2006) and Brevik and Gartner (2008), the selfish government is prevented from seizing the entire tax base, and giving up a chance for re-election, by a public that is willing tolerate a sufficiently high tax rate. For example, in the studies by James Ellis and Fender (2006) and Brevik and Gartner (2008), the selfish government is prevented from seizing the entire tax base, and giving up a chance for re-election, by a public that is willing tolerate a sufficiently high tax rate.…”

“…This difference in modeling the government has important consequences for how tax policy is determined. For example, in the studies by James Ellis and Fender (2006) and Brevik and Gartner (2008), the selfish government is prevented from seizing the entire tax base, and giving up a chance for re-election, by a public that is willing tolerate a sufficiently high tax rate. The presence of a high tax rate encourages the government to curb its bad behavior so that it can run for re-election.…”

“…This literature has not explored how corruption, and the related political institutions that foster or discourage it, affects fiscal policy and the size of government. A more recent work by Brevik and Gartner (2008) analyzes how tax evasion may check the behavior of an entirely selfish government. As mentioned above, their theory predicts that higher tax evasion leads to higher tax rates, although lower tax revenue.…”