| Abstract: | The paper analyses the impact of tax evasion on government budgets, using a monetary circuit model. It is possible to show that, under specific parameter values, evading taxes on profit becomes an attractive proposition when government policies tax capital and employment in different ways and on different timescales. Without adequate tax enforcement, government is reduced to acting as a financial backer for companies. Furthermore, a lower tax rate on labour income enabling money to flow from households to companies through private consumption reduces incentives for tax evasion. These results hold true even if the government decides to implement a balanced budget fiscal policy. |
