CoPS/IMPACT Working Paper Number IP-71

Title: Can Tax Reform Work in an Economy Where Tax Avoidance and Evasion are Endemic?

Author: Edimon Ginting


In this model firms seek to minimise their tax liabilities by purchasing rent-seeking services from a provider who also sells legitimate public services to the government. The provider enjoys economies of scope - its two outputs are produced jointly. Tax reform in this setting can increase both government revenue and the efficiency of the economy because a type of Laffer curve is operational and because such reform can lead to resources being moved out of rent-seeking activity. Later this partial equilibrium framework will be embedded within a conventional general equilibrium model.

JEL classification: C68, D72

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