Tax evasion and debt dynamics with endogenous growth

In this note, we study the relationship between tax evasion and economic growth in a model where public expenditure allows to improve private capital productivity, and it is financed by both taxes and public debt. Here, we define debt to be sustainable if the debt/GDP ratio resulting from agents optimization converges toward a finite equilibrium that is endogenous to the model. We show that: (i) the level of public expenditure which maximizes growth does not depend on audit parameters, (ii) evasion reduces the range of parameters for which the debt/GDP ratio is sustainable, and (iii) the debt/GDP ratio is sustainable if the total factor productivity is sufficiently high.