Citation:
[Journal:] Czech Journal of Economics and Finance [ISSN:] 0015-1920 [Volume:] 68 [Issue:] 4 [Publisher:] Institute of Economic Studies, Faculty of Social Sciences, Charles University [Place:] Prague [Year:] 2018 [Pages:] 399-414
Publisher:
Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague
Abstract:
This paper explores the effects of fiscal policy in the presence of a VAT evasion channel, and then compares and contrasts two regimes - the exogenous vs. optimal policy case. To this end, a dynamic general-equilibrium model, calibrated to Bulgarian data (1999-2014), is augmented with a government sector. The main findings from the computational experiments performed in the paper are: (i) The optimal steady-state income tax rate is zero; (ii) The benevolent Ramsey planner provides the optimal amount of the valuable public services, which are now three times lower; (iii) The size of the grey sector is twice lower; (iv) optimal steady-state consumption tax needed to finance the optimal level of government spending is twice lower, as compared to the exogenous policy case.