Institute of Economic Research, Seoul National University
Abstract
We construct an overlapping-generations model where individuals
evade capital income tax and carry out the short- and the longrun
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
