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Is consumption-Laffer curve hump-shaped? The role of VAT evasion

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  • Vasilev, Aleksandar

Abstract

This paper shows a standard RBC model, when augmented with a VAT evasion channel, where evasion depends on the consumption tax rate, can produce a hump-shaped consumption Laffer curve. Furthermore, when the evasion channel is turned off, the hump in the Laffer curve disappears, resulting in a monotone relationship between the VAT rate and both the consumption and total tax revenue. This result comes in stark contrast to Hiragara and Nituhara (2015), who generate a peaking curve for consumption tax revenue in a model with a separable utility in consumption and leisure and no evasion. Their results are contingent on implausible values for elasticity parameters, and in addition predict a revenue-maximizing consumption tax rate which is implausibly high. The paper contributes to the public finance literature by providing evidence for the importance of the evasion mechanism, while at the same time adding to the debate about the existence of a peak tax rate for consumption tax revenue.

Suggested Citation

  • Vasilev, Aleksandar, 2016. "Is consumption-Laffer curve hump-shaped? The role of VAT evasion," EconStor Preprints 147001, ZBW - Leibniz Information Centre for Economics.
    • Handle: RePEc:zbw:esprep:147001
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    File URL: https://www.econstor.eu/bitstream/10419/147001/1/Cons_Laffer_3.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    consumption Laffer curve; VAT evasion; general equilibrium; fiscal policy;
    All these keywords.

    JEL classification:

    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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