Can the optimal fiscal policy counteract corporate tax evasion without harming job creation?

This paper studies the relationship between corporate tax evasion, job creation, and the optimal fiscal policy. As a rule, an optimal fiscal policy should spur tax compliance (thereby reducing tax evasion) without harming job creation. Anti-tax evasion policies, therefore, should be related to job creation policies. The paper finds that anti-tax evasion and job creation policies change according to the extent of tax evasion in the economy. Precisely, when tax evasion is widespread, a lower tax burden (tax cuts or provision of fiscal rewards) requires tighter tax audits; whereas, where most people comply with tax rules, a decrease in tax audits is possible. A system of two simultaneous equations carried out on a panel dataset that covers 54 countries (both developed and developing) and four years (2018-2021) supports the model-generated theoretical relationships.