We develop a general theoretical model to compare two different policymakers both facing tax evasion. Policymakers differs in that they aim to maximize either the fiscal revenues (T ) as in a social-democracy as, e.g., Sweden, or the GDP as in a capitalistic country as, e.g., the USA. Both...

The government influences the equilibrium size of hidden activity. Higher taxes give an incentive to evade. The provision of public services, social transfers and public employment may have offsetting effects on the underground economy. The budget constraint makes the relation between the shadow...