We analyze the relation between tax enforcement, aggregate output and government revenue when imperfectly competitive firms evade a specific output tax. We show that aggregate output decreases with tax enforcement. Government revenue increases with enforcement when the tax is low. When the tax...

Since Sandmo (1981), many articles have analyzed optimal fiscal policies in economies with tax evasion. All share a feature: they assume that the cost of enforcing the tax law is exogenous. However, governments often invest resources to reduce these enforcement costs. In a very simple model, we...