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MODELING DISTORTIONARY TAXATION

Panagiotis Chronis
Bank of Greece, Economic Research Department



ABSTRACT

There has been a lot of discussion recently regarding the macroeconomic consequences of a distortionary taxation system. However the way this distortionary taxation scheme or instrument is modeled in macroeconomic analysis, as well as the ability of these models to capture the effects implied by this distortionary taxation system, is subject to criticism. This work provides a formal analysis in an attempt to build a methodological tool (i.e. a functional form), in order to capture the distortionary consequences of the tax system. This tool could be a useful instrument in economic analysis regarding the effects of a distortionary taxation system, and its relation to the other macroeconomic variables, like for example debt, deficit, and inflation.

Keywords: Distortionary Taxation; Income Tax; Tax Revenue; Tax evasion; Tax Compliance; Dynamic path of debt

JEL classification: C00; H30; H20; H26; H24; H60; E62; B41


Acknowledgements:
I would like to thank V. Droucopoulos, A. Strantzalou and H. Gibson for their useful comments and suggestions. All remaining errors are mine. The views expressed in this paper are the views of the author and do not necessarily reflect the views of the Bank of Greece.



Correspondence:
Panagiotis Chronis
Economic Research Department,
Bank of Greece, 21 E. Venizelos Ave.,
102 50 Athens, Greece
Tel: +30 210 3202368
E-mail: pchronis@bankofgreece.gr

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