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[Journal:] The Open Economics Journal [ISSN:] 1874-9194h [Volume:] 3 [Publisher:] Bentham Open [Place:] Sharjah [Year:] 2010 [Pages:] 14-24
Bentham Open, Sharjah
This paper shows that an increase in corporate/labor/income tax rates may push an economy with tax evasion into an expansionary pattern, under increasing returns to scale. These effects would be reversed when the steady state is saddle-path stable. This model does not undertake a full identification. The interesting feature of our results is that fiscal policy in an economy with a significant underground sector may provide inadvisable outcomes. Thus, tax policies can generate counterproductive results in an economy characterized by existence of aggregate increasing returns to scale and underground activities.
dynamic general equilibrium models
fiscal policy
tax evasion and underground activities
indeterminacy and sunspots
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