Tax Adjustments and Informal Economy in the Czech Republic and Slovakia: A DSGE Approach



Year of publication 2020
Type Article in Proceedings
Conference Quantitative Methods in Economics; Multiple Criteria Decision Making XX
MU Faculty or unit

Faculty of Economics and Administration

Web Conference proceedings
Keywords DSGE model; informal economy; Laffer curve; tax evasion
Description The goal of this paper is to quantify and compare the impacts of alternative tax adjustments in the corporate tax rate on the size of the shadow economy and, consequently, on government tax revenues in Slovakia and the Czech Republic. In this contribution, we present results based on a small dynamic stochastic general equilibrium (DSGE) model consisting of both formal and informal sectors of an economy. We estimate this DSGE model in linearized form for both Slovak and Czech economies, using the quarterly data for household consumption, investments, total gross wages, probability of tax audit, and several measures for government revenues. Based on the estimated parameter values, we perform a set of simulations using the non-linear form of the underlying DSGE model to evaluate the differences in effects of changes in the corporate tax rate on the two economies of interest. These effects are evaluated with regards to the changes in steady-state values of the output in the official economy, total tax revenues, and the size of the shadow economy. The corresponding Laffer curves help us to analyze the reaction of the informal economy in response to changes in the corporate tax rates, and subsequent effects on the size of the government tax revenues.
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