Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/201920
Authors: 
Pappadà, Francesco
Zylberberg, Yanos
Year of Publication: 
2019
Series/Report no.: 
CESifo Working Paper No. 7694
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
We show that, in many countries, tax compliance is volatile and markedly responds to fiscal policy. To explore the consequence of this novel stylized fact, we build a model of sovereign debt with limited commitment and imperfect tax enforcement. Fiscal policy persistently affects the size of the informal economy, which impact future fiscal revenues and thus default risk. This mechanism captures one key empirical regularity of economies with imperfect tax enforcement: the low sensitivity of debt price to fiscal consolidations. The interaction of imperfect tax enforcement and limited commitment strongly constrains the dynamics of optimal fiscal policy. During default crises, high tax distortions force the government towards extreme fiscal policies, notably including costly austerity spells.
Subjects: 
sovereign default
imperfect tax enforcement
informal economy
fiscal policy
JEL: 
E02
E32
E62
F41
H20
Document Type: 
Working Paper

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