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Crime, Human Capital, and the Impact of Different Taxation

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Abstract

This paper presents a macroeconomic model with crime, human capital, and three taxation policies (consumption, labour, and capital income taxes). In an extension, we endogenize the probability of escaping punishment to depend on government expenditure on public security/police. The model is solved analytically and numerically to derive propositions, which are then verified empirically using cross-country data. Compared to the literature, we find a much higher threshold probability. Above the threshold, the equilibrium crime rate is positively related to the escape probability. In addition, above this threshold level, a rise in capital income tax or a decline in labour income tax would lead to a higher equilibrium crime rate, if the taxes are modelled using marginal tax rates. There also appears to be empirical supports where the equilibrium human capital level depends positively on consumption tax. Lastly, when the probability is endogenized, there also exists a threshold level for the spending on public security/police, above which consumption tax and capital income tax have positive e¤ects on the equilibrium level of human capital.