A Dynamic Portfolio Choice Model of Tax Evasion

Abstract

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 ovel 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 ates in the presence of tax evasion.