Capital Income Tax Evasion, Capital Accumulation and Welfare

Hideya Kato ; Mitsuyoshi Yanagihara

Associate Professor, Faculty of Economics, Nagoya Keizai University, 61-1 Uchikubo, Inuyama, Aichi, 484-8504, Japan, Tel: +81-568-67-0511, Fax: +81-568-67-4299 kato@nagoya-ku.ac.jp
Corresponding Author, Associate Professor, Graduate School of Economics, Nagoya University, Furo-cho, Chikusaku, Nagoya, Aichi, 464-8601, Japan, Tel: +81-52-789-5952, Fax: +81-52-789-4924 yanagi@soec.nagoya-u.ac.jp

JEL Classification: D91, E22, H26, H31

Abstract

We construct an overlapping-generations model where individuals evade capital income tax and carry out the short- and the long-run analyses to abstract the pure effects of policy parameters such as the capital income tax rate and the penalty rate on welfare levels. We show that: (i) undeclared savings may increase both in the short- and the long-run, even when the tax rate (the penalty rate) decreases (increases); (ii) there are trade-offs within each policy and across policies regarding the welfare effects in the short- and the long-run; (iii) both the welfare levels and the government revenue increase in the long-run if the tax rate decreases or the penalty rate increases, as long as the elasticities of such parameters on capital stock are sufficiently large.

Keywords:

Tax evasion, Capital accumulation, Overlapping-generations model, Welfare trade-offs

Acknowledgments

We would like to thank Kojun Hamada for his contributions at the Japanese Economic Association Autumn Meeting, Kunihiko Kaneko, Yoshinao Sahashi, Terukazu Suruga, Tatsuhiro Shichijo, Shingo Takagi, Yasutomo Murasawa, Akira Momota, and Shigeru Watanabe for their contributions at the Seminar of Economic Theory, and Econometrics at Osaka Prefectural University, and Tatsuo Hatta, Ryo Horii, Nobuhiro Hosoe, Akihiko Kaneko, Shinji Miyake, Yasusada Murata, Takumi Naito, Yoshitomo Ogawa, and Ryosuke Okamoto for their valuable suggestions and helpful comments at the Seminar of Spatial Public Economics at Tokyo University. We would also like to acknowledge the contributions of Hideo Hashimoto, Masaki Hashimoto, and Nobuhito Takeuchi. The authors assume responsibility for any remaining errors.

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