Andrew Feltenstein, ICePP director Jorge Martinez-Vazquez, Biplab Datta, and Sohani Fatehin have released a paper called “A General Equilibrium Model of Value Added Tax Evasion: An Application to Pakistan.” In it, they develop a computable general equilibrium framework for analyzing endogenous VAT tax evasion and apply the model to Pakistan data to show the level of enforcement spending required to achieve certain VAT collection targets. They also examine the short-, medium-, and long-term macroeconomic outlooks, and real consumption distribution across household economic groups associated with higher enforcement spending, calibrating the model using 2016 as the base year and then running the dynamic model forward for 20 years. For VAT revenue target of 8% and 15% of the GDP, they find those goals require an increase in enforcement spending by a compounded 46.4% and 322.4%, respectively. Finally, they find that the increased enforcement spending enhances the sustainability of the government’s budget deficit without causing a decline in real GDP over the long-term, while causing a decline in interest and inflation rates, and while resulting in a small regressive impact of households’ real consumption.
Read the full working paper here.
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