Tax evasion and financial repression: a reconsideration using endogenous growth models

Abstract

PurposeThis paper aims at developing a theoretical model of a world economy characterized by tax evasion. It seeks to analyze whether financial repression can be explained by tax evasion.Design/methodology/approachThe analysis is performed in overlapping generations dynamic general equilibrium endogenous monetary growth models.FindingsThe paper shows that higher degree of tax evasion within a country, resulting from a higher level of corruption and a lower penalty rate, yields higher degrees of financial repression.Practical implicationsFinancial repression can be explained by tax evasion but under specific conditions.Originality/valueThis is the first attempt to analyze financial repression and tax evasion in an endogenous growth model.