Working Paper Series
IFAU - Institute for Evaluation of Labour Market and Education Policy
Ann-Sofie Kolm and Birthe Larsen
Does tax evasion affect unemployment and educational choice?
Abstract: To examine the macro economic effects of government tax
and punishment policies, this paper develops a three-sector general
quilibrium model featuring matching frictions, heterogenous abilities and
an informal sector with tax evasion. 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. Characterizing the optimal
tax and punishment system, we show that it is optimal to more than fully
counteract the distortion created by the government’s inability to tax the
informal sector. The optimal choice of tax and punishment system, however,
implies an inefficiently low stock of educated workers.
Keywords: Tax evasion; underground economy; education; matching; unemployment; (follow links to similar papers)
JEL-Codes: H26; I21; J64; (follow links to similar papers)
37 pages, April 15, 2004
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