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Department of Economics, Copenhagen Business School Working Paper Series, Department of Economics, Copenhagen Business School

No 12-2003:
Does Tax Evasion Affect Unemployment and Educational Choice?

Ann-Sofie Kolm and Birthe Larsen

Abstract: While examining the macroeconomic effects of government tax and punishment policies, this paper develops a three-sector general equilibrium model featuring matching frictions and worker-firm wage bargaining. Workers are assumed to differ in ability, and the choice of education is determined endogenously. Job opportunities in an informal sector are available only to workers who choose not to acquire higher education. We find that increased punishment of informal activities increases the number of educated workers and reduces the number of unemployed workers. Considering welfare, we show it is optimal to choose punishment rates so to more than fully counteract the distortion created by the government’s inability to tax the informal sector.

Keywords: Tax evasion; underground economy; education; matching; unemployment.; (follow links to similar papers)

JEL-Codes: H26; I21; J64; (follow links to similar papers)

36 pages, November 12, 2006

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