Tax evasion and financial repression : a reconsideration using endogenous growth models

Abstract

PURPOSE: This paper aims at developing a theoretical model of a world economy characterized by tax evasion. It seeks to analyze whether financial repression can be explained by tax evasion. DESIGN/METHODOLOGY/APPROACH: The analysis is performed in overlapping generations dynamic general equilibrium endogenous monetary growth models. FINDINGS: The paper shows that higher degree of tax evasion within a country, resulting from a higher level of corruption and a lower penalty rate, yields higher degrees of financial repression. PRACTICAL IMPLICATIONS: Financial repression can be explained by tax evasion but under specific conditions. ORIGINALITY/VALUE: This is the first attempt to analyze financial repression and tax evasion in an endogenous growth model.