Tax Evasion and the Laffer Curve: Estimates for OECD Countries

The main objective of this paper is to answer the following crucial question for the implementation of fiscal policy: How do the shadow economy and the resulting tax evasion affect the slope of the Laffer curve and consequently the magnitude of the incentive effects of tax changes? By answering this inquiry, we believe that we will offer some advancement to the current debate on the effectiveness of fiscal policy instruments during fiscal crises. To this purpose, we empirically estimate the relation between tax revenues and tax rates for a group of OECD countries. Our empirical specification will be based on a static equilibrium model with endogenous tax evasion.