| Abstract |
The tax revenue-to-GDP ratio of Taiwan has gradually declined since 1995.
Among various methods to raise tax revenues, this study focuses on increasing tax
evasion penalty on the underground economy and increasing the consumption tax
rate, which is often proposed in the literature of tax reforms. This paper finds that
both methods can raise tax revenues, but have negative impact on total output, labor
income, and investment. The former, however, has less negative macroeconomic
effects than the latter, and increasing tax evasion penalty has additional benefits of
shrinking the underground economy. Using the DSGE (dynamic stochastic general
equilibrium) modeling approach, the paper assesses the underground economy and
find that it is about 28.4％of total output in Taiwan. |
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