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Volume 68, Issue 4

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Optimal Fiscal Policy in the Presence of VAT Evasion: The Case of Bulgaria

Vasilev, Alexandar

Year: 2018   Volume: 68   Issue: 4   Pages: 399-414

Abstract: This paper explores the effects of fiscal policy in the presence of a VAT evasion channel, and then compares and contrasts two regimes - the exogenous vs. optimal policy case. To this end, a dynamic general-equilibrium model, calibrated to Bulgarian data (1999-2014), is augmented with a government sector. The main findings from the computational experiments performed in the paper are: (i) The optimal steady-state income tax rate is zero; (ii) The benevolent Ramsey planner provides the optimal amount of the valuable public services, which are now three times lower; (iii) The size of the grey sector is twice lower; (iv) optimal steady-state consumption tax needed to finance the optimal level of government spending is twice lower, as compared to the exogenous policy case.

JEL classification: D58, E26, H26

Keywords: consumption tax, income tax, VAT evasion, general equilibrium, fiscal policy, Bulgaria

RePEc: https://ideas.repec.org/a/fau/fauart/v68y2018i4p399-414.html

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