A dynamic portfolio choice model of tax evasion: Comparative statics of tax rates and its implication for economic growth

This paper extends the portfolio choice model of tax evasion from a static to a dynamic setting. It is shown that while higher tax rates repress tax evasion in the static model, they encourage tax evasion in the dynamic model. We explore a novel implication of this result and show that while growth is decreasing in tax rates in the absence of tax evasion, it is U-shaped in tax rates in the presence of tax evasion. (C) 2001 Elsevier Science B.V. All rights reserved.