Tax evasion and financial repression: A reconsideration using endogenous growth models

Using two dynamic monetary general equilibrium models characterized by endogenous growth, financial repression and endogenously determined tax evasion, we analyze whether financial repression can be explained by tax evasion. When calibrated to four Southern European economies, we show that higher degrees of tax evasion within a country, resulting from a higher level of corruption and a lower penalty rate, yields higher degrees of financial repression as a social optimum. However, a higher degree of tax evasion, due to a lower tax rate, reduces the severity of the financial restriction. In addition, we find the results to be robust across growth models with or without productive public expenditures. The only difference being that the policy parameters in the former case have higher optimal values.Underground Economy; Tax Evasion; Macroeconomic Policy

Aggregate Outbound Tourism Demand in South Africa: an Econometric Analysis

This paper, with the use of annual data covering the period 1975 to 2008, seeks to identify the determinants of outbound tourism demand (outbound tourist outflows) in South Africa. We employ cointegration analysis by utilising an autoregressive distributed lag (ARDL) approach proposed by Pesaran et al. (2001) to make inferences about the long run and short run relationships. The results indicate that in the long run, outbound tourism demand is influenced by the real domestic income and the relative prices. Our results indicate that outbound tourism demand is a luxury good with an income elasticity of 3.5. In the short run, only relative prices have an impact on outbound tourism demand in South Africa. Outbound tourism demand was found to be price inelastic in both periods

Costly Tax Enforcement and Financial Repression

Using an overlapping generations production-economy model characterised by financial repression, purposeful government expenditures and tax collection costs, we analyse whether financial repression can be explained by the cost of raising taxes. We show that with public expenditures affecting utility of the agents, modest costs of tax collection tend to result in financial repression being pursued as an optimal policy by the consolidated government. However, when public expenditures are purposeless, the above result only holds for relatively higher costs of tax collection. But, more importantly, costs of tax collection cannot produce a monotonic increase in the reserve requirements. Of critical importance in this regard, are the weights the consumer assigns to the public good in the utility function and the size of the government.

Misalignment In The Growth-Maximizing Policies Under Alternative Assumptions Of Tax Evasion

Using an overlapping generations monetary endogenous growth model, we analyze the possible misalignment in the growth-maximizing policies if tax evasion is assumed to be exogenous instead of being treated as a behavioral decision of the agents. By allowing for government transfers to affect young-age income, and, hence, a role for monetary policy, besides fiscal policy, in the determination of the agents reported income, we show that the failure on part of the government to realize tax evasion as endogenous, results in higher tax rates, reserve requirements and money growth rate. This, in turn, implies that the economy would end up experiencing lower (higher) steady-state growth (inflation)

Domestic resources for development financing in Namibia: Constraints and opportunities

To translate Vision 2030 into reality, the government prepares National Development Plans (NDPs), which outline the programmes and projects that the country intends to pursue over successive five-year periods. The current NDP, the fourth in the series, has adopted three over-arching goals: economic growth, employment creation and reducing income inequality. To realise these development objectives, the country needs to enhance the mobilisation of domestic resources. The Government of the Republic of Namibia (GRN) recognises the need for enhanced revenue mobilisation and has stated thus “the imperative to fund critical national priority needs calls on government to strengthen revenue mobilization strategies and increasingly harness measures to improve internal efficiency, reduce waste and realize internal savings as important facets for public finance management in the medium-term” (Ministry of Finance, 2013). This paper analyses past trends in domestic resource mobilisation in Namibia, to identify its pace and its constraints for funding development projects. The main objective of the study is to identify fiscal space which can be used to finance national development in Namibia and to propose policy options for enhancing domestic resource mobilisation

Costly Tax Enforcement And Financial Repression: A Reconsideration Using An Endogenous Growth Model

Using a monetary endogenous growth overlapping generations model characterized by financial repression, purposeful government expenditures and costly tax enforcement, we analyze whether financial repression can be explained by the cost involved in raising taxes. Note financial repression is modeled via “high” obligatory reserve requirements that banks in the economy need to hold. We show that higher costs of tax collection produce a monotonic increase in reserve requirements. Moreover, the government tends to rely more on indirect taxation, compared to direct taxation, as costs of tax collection increases.&nbsp

Openness, Bureaucratic Corruption And Public Policy In An Endogenous Growth Model

In this paper, we develop a dynamic general equilibrium overlapping generations monetary endogenous growth model of a financially repressed small open economy characterized by bureaucratic corruption, and, in turn, analyze optimal policy decisions of the government following an increase in the degree of corruption. As suggested in the empirical literature, we find that increases in the degree of corruption should ideally result in an increase in the ratio of seigniorage to total revenue, as an optimal response of the benevolent government. In addition, higher degrees of corruption are also found to be accompanied by higher levels of financial repression.&nbsp

Bank Credit and Aggregate Import Demand in South Africa: An Autoregressive Distributed Lag Approach

This study reformulated the aggregate import demand function for South Africa by incorporating a financial variable, bank credit. The study used the bounds testing approach for cointegration and the autoregressive distributed lag models to estimate short-run and long-run elasticities of aggregate import demand. The cointegration results confirm a long run relationship between the quantity of imports and the explanatory variables. Although bank credit has a positive impact on aggregate imports, it is statistically insignificant. It is statistically significant in the short-run. Our results suggest that bank credit is insufficient as a policy instrument for longterm import demand in South Africa. It can only be useful in managing the South African external balance in the short-run

An Analysis of Macroeconomic Determinants of Remittances in Southern Africa

The study analyzed macroeconomic determinants of remittances in Southern Africa and used annual data for the period ranging from 2003-2016. The macroeconomic determinants used include: remittances themselves, inflation rate, GDP growth rate, nominal exchange rate, broad money and age dependency ratio. A panel study was carried out using both the fixed and random methods of which the random method was found to be most appropriate. The countries included in the study were Botswana, Lesotho, Malawi, Mozambique, South Africa, Swaziland and Zambia. It was found that of the variables used, only changes/improvements in the home countries’ economic environment and the exchange rate were statistically significant

Essays on public finance and economic growth using dynamic general equilibrium models

This thesis comprises of six independent chapters, besides the introduction and conclusions, with the common theme of optimal public policies in dynamic general equilibrium models with different kinds of distortions. Broadly speaking, the issues considered are: tax evasion, bureaucratic corruption, costs of tax collection and endogenous probability of survival. With financial repression being modeled via obligatory reserve requirements that banks in the economy need to hold, the second chapter analyzes whether financial repression can be explained by endogenous tax evasion. In this regard the chapter develops two dynamic monetary general equilibrium endogenous growth models. When calibrated to four southern European countries, we indicate that higher degrees of tax evasion emanating from higher corruption and lower penalty rates would result in financial repression as a welfare-maximizing outcome. The third chapter develops an overlapping generations monetary endogenous growth model characterized by tax evasion, and analyzes the effect of the nature of tax evasion on the growth maximizing policies. It is concluded that a growth-maximizing government has to take the behavioral nature of tax evasion into account, since failure to do so will lead to misalignment in not only fiscal but also monetary policies. In fact, the government is found to repress the financial sector more than the optimal level if it treats tax evasion as exogenous. The fourth chapter develops a dynamic general equilibrium overlapping generations monetary endogenous growth model of a financially repressed small open economy characterized by bureaucratic corruption, and uses it to analyze optimal policy decisions of the government following an increase in the degree of corruption. We find that increases in the degree of corruption should ideally result in a fall in seigniorage, as an optimal response of the benevolent government. In addition, higher degrees of corruption should also be accompanied with lower levels of financial repression. Chapter five develops a production-economy overlapping generations model characterized by financial repression, purposeful government expenditures and costly tax collection, to analyze whether ¯nancial repression can be explained by the cost of raising taxes. It is shown that costs of tax collection cannot produce a monotonic increase in the reserve requirements, what are critical, in this regard, are the weights the consumer assigns to the public good in the utility function and the size of the government. Chapter six analyzes the same issues as in the previous chapter, but in a monetary endogenous growth model. We show that higher costs of tax collection produce a monotonic increase in reserve requirements. Moreover, the government tends to rely more on indirect taxation, compared to direct taxation as costs of tax collection increase. The seventh chapter develops a simple monetary pure-exchange two-period overlapping generations model characterized by financial repression and endogenous mortality. The probability of survival of the young agents is assumed to depend upon the share of government expenditure on health, education and infrastructure. In this setting, we analyze the welfare-maximizing policy mix between explicit and implicit taxation for a benevolent government. We show that increases in the survival probability lead to an increase in the reliance on seigniorage as a welfare maximizing outcome. However, for our results to hold, the seigniorage tax base must be large enough for the benevolent planner to use the inflation tax. Each of the chapters aims to provide the theoretical underpinnings behind the design of optimal fiscal and monetary policies under tax evasion, bureaucratic corruption, costs of tax collection and endogenous probability of survival. With each of the models based on proper micro foundations and calibrated to match features of developing economies, the six independent papers attempt to broaden our understanding on public policies in the presence of commonly observed distortions that characterize the developing world.Thesis (PhD)--University of Pretoria, 2009.Economicsunrestricte