Optimal tax design with costly tax evasion

Siqi Wang () and Jun-ichi Itaya ()
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Siqi Wang: Graduate School of Economics and Business, Hokkaido University

Economics Bulletin, 2023, vol. 43, issue 3, 1271 - 1278

Abstract: This paper extends the Atkinson-Stiglitz analysis to a dynamic overlapping generations model, incorporating the realistic assumption that agents can evade labor income taxes by misreporting their true income. They can do so by incurring both non-monetary and monetary costs, which are distinguished in the paper and shown to have different implications for optimal tax policies. By considering the monetary cost as a deferred payment, the paper shows that tax evasion concerns can render the well-known Atkinson-Stiglitz theorem invalid and provides critical insights into how different types of costs affect tax schedules.

JEL-codes: H2 H3 (search for similar items in EconPapers)
Date: 2023-09-30
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