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Entrepreneurship and tax evasion

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  • Fernández-Bastidas, Rocío

Abstract

Business income is systematically underreported and accounts for a sizable share of the US tax gap. This paper examines the importance of tax evasion in the entrepreneurial sector for the effects of tax reforms. I analyze the long-run effects of switching from a progressive income tax to a proportional one in a model with heterogeneous agents and incomplete markets, including an entrepreneurial choice and a tax evasion decision. Explicitly considering tax evasion in this reform implies (i) significantly lower increases in capital accumulation and output and (ii) a less negative impact on wealth concentration. This finding contrasts with the results obtained when abstracting from tax evasion, which implies much higher output and capital responses and a more adverse impact on wealth inequality; thus, accounting for entrepreneurs’ evasion behavior is vital for the quantitative analysis of tax reforms.

Suggested Citation

  • Fernández-Bastidas, Rocío, 2023. "Entrepreneurship and tax evasion," Economic Modelling, Elsevier, vol. 128(C).
    • Handle: RePEc:eee:ecmode:v:128:y:2023:i:c:s0264999323003000
    DOI: 10.1016/j.econmod.2023.106488
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    More about this item

    Keywords

    Tax evasion; Entrepreneurs; Wealth inequality; Progressive income taxation;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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