The relationship between tax evasion and tax revenue in Chang, Lai and Chang (1999)

Abstract

Chang, Lai and Chang (1999) use a micro-founded short-term macroeconomic model, with an imperfectly competitive market, to analyze, among other issues, the relationship between tax evasion and tax revenue. They show that this relationship depends upon the market structure. In particular, when the market becomes perfectly competitive, this relationship can be non monotonic. Although CLC give an intuition of this result, based on the interaction of two opposite effects, they do not make explicit the form of this relationship. The goal of this note is precisely to show that, within the Chang, Lai and Chang (1999) model, one can completely characterize the shape of the relationship between tax evasion and tax revenue under perfect competition. Under some parametric conditions, the tax revenue decreases with tax evasion otherwise, their relationship takes the form of a `Laffer curve'.