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Tax Evasion and Optimal Corporate Income Tax Rates in a Growing Economy

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  • Hori, Takeo
  • Maebayashi, Noritaka
  • Morimoto, Keiichi

Abstract

We explore how tax evasion by firms affects the growth- and welfare-maximizing rates of corporate income tax (CIT) in an endogenous growth model with productive public service. We show that the negative effect of CIT on growth is mitigated in the presence of tax evasion. This increases the benefit of raising the CIT rate for public service provision. Thus, in contrast to Barro (1990), the optimal tax rate is higher than the output elasticity of public service. Through numerical exercises, we demonstrate that the role of tax evasion by firms is quantitatively significant.

Suggested Citation

  • Hori, Takeo & Maebayashi, Noritaka & Morimoto, Keiichi, 2018. "Tax Evasion and Optimal Corporate Income Tax Rates in a Growing Economy," MPRA Paper 90787, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:90787
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    References listed on IDEAS

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    More about this item

    Keywords

    corporate income tax; tax evasion; growth; welfare;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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