The economics of tax enforcement

It is usually the case that in developing economies governments have limited capacity to enforce tax compliance among economic agents. The aggregate economic effects of this lack of enforcement capacity are not yet well understood. This dissertation is an attempt to fill this gap. In particular, I develop competitive general equilibrium models able to capture how a poor tax enforcement may affect aggregate output and productivity, the size of the informal sector, and the size distribution of firms.;In chapter 1 I study an economy in which the government is not able to perfectly enforce tax compliance among operating firms and compare it with one in which perfect enforcement is attainable. I develop a competitive general equilibrium model where imperfect tax enforcement may affect aggregate outcomes through two mechanisms. First, it may distort firms' optimal output level as long as the probability of avoiding tax compliance is related to the firm's size. Second, poor tax enforcement may lead to a low provision of the public goods that complement firms' productivity. The results for a calibrated version of the model suggest that in economies with tax enforcement problems aggregate output might be reduced by 12%. I also conclude that sizeable aggregate effects can be obtained only when the public goods mechanism is at work.;The size distribution of firms in the manufacturing industry in developing countries is different from the corresponding one in OECD economies. In the developing world small firms are by far relatively more important and medium size firms are scarce. The latter has been described as a "missing middle" in the size distribution of firms. In chapter 2 I develop a simple competitive general equilibrium model in which the missing middle arises endogenously as a result of a government lacking capacity to enforce tax compliance. I introduce a tax enforcement technology to an otherwise standard competitive model with heterogenous firms. The tax enforcement technology is modeled as the probability that an informal firm gets detected and punished by the government. This probability is increasing in firm size. I calibrate the model to the US economy under the assumption of perfect enforcement. I then introduce different degrees of tax enforcement capacity. Finally I simulate and numerically solve the model in order to study the effects over the size distribution of firms. The model delivers a missing middle and its location moves to the right of the distribution as the tax enforcement capacity worsens. In line with empirical evidence, the model generates an informal sector in the left side of the distribution. Also as the tax enforcement capacity worsens, the equilibrium wage decreases and entry of firms with low productivity takes place.