This article applies the central feature of imperfect competition in the goods market to examine the validity of the Peacock and Shaw assertion that an increase in tax evasion will definitely lead to a higher domestic income and a lower level of total tax collections. The authors provide, for the first time, a solid microfoundation for the macroeconomic equilibrium with the activity of tax evasion. It is shown that the profit margin in imperfect competition is the key factor in determining whether the Peacock and Shaw belief is valid.
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