A theoretical examination of tax evasion among the self-employed

Informal activities are looked upon by most governments as a loss in potential revenue. An extension of the Ramsey model is presented that includes an income tax and a parameter that allows for the evasion of part or all of those taxes. The model shows the decrease in government revenue and long term levels of consumption and capital. However, the growth rate of capital and consumption remains unaffected by informal activities. The model does not include any assumptions about how individuals will choose to spend the money they save by evading taxes.