We study optimal public expenditure and tax enforcement in a simple one-sector, dynamic endogenous growth model where agents optimize consumption and evasion; evasion is costly, while public expenditure increases private capital productivity. We show that tax evasion costs and the efficiency of endogenous audits play a crucial role in determining the relationship between tax evasion, tax rates, public expenditure, and growth. The key elements to improve tax enforcement are efficiency in the audit process and increased productivity in public expenditure. Increasing tax evasion costs could reduce tax evasion, but when tax enforcement is inefficient, this might trigger a perverse effect in which a tax rate increase reduces tax revenue. This finding implies that government spending depends on the efficiency of the audit process: expanding government expenditure optimally or increasing private productivity is impossible without improvements in tax compliance. •We study optimal tax and audit policies in a model with tax evasion.•Tax evasion-related costs and audit efficiency are keys to a successful tax policy.•High noncompliance costs in an inefficient public sector cause a Laffer curve effect.•By reducing public productive input, tax evasion becomes self-reinforcing.•Investing in the efficiency of audits and public spending reduces tax evasion.