Tax Evasion and Provision of Public Goods: Implications for Wage and Employment

Abstract

This exploratory paper analyses, theoretically with some numerical examples, the relationship between tax evasion and provision of public goods. In this model, we incorporate tax evasion leading to a fall in the supply of public goods. We investigate the relation between provision of public goods and wages of workers engaged in the production of public goods and an intermediate private goods. We show that under plausible conditions, and parameter values, fall in the number of taxpayers leads not only to fall in the provision of public goods, but also lowers wages. We find a threshold level of marginal cost associated with supply of public goods, above which the rise in the number of taxpayers may still lower provision of public goods and worker’s wages. JEL Classifications: H26, H41, E24