TAX EVASION, INFLATION AND STABILIZATION

This paper focuses on the public resort to tax evasion in developing countries as an adjustment tactic during economic downturn. We show, using a theoretical model of intertemporal consumption, that tax compliance declines when current income declines, expectations about future income improve, or inflation rises. We then apply the model empirically to the cases of Argentina, Brazil and Chile, three countries which have long experience with tax evasion and inflation over the last 40 years, and find confirmation.