Abstract
This paper develops an intersectoral model of income tax evasion with general equilibrium effects. Key elements of the model are imperfectly substitutable outputs from the compliant and evading sectors and workers with heterogeneous evasion costs. The model allows for biased public expenditures, a wide range of behavioural responses, and both legitimate and criminal activities evading tax as well as tax-avoidance activities. Qualitative and quantitative assessments are undertaken for the effects of tax rate changes on evasion activity, relative output prices, and real tax revenues. This approach offers useful findings for taxation policy and is amenable to further analytical extensions.
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