Tax evasion and the optimal non-linear labour income taxation

Salvador Balle, Lucia Mangiavacchi, Luca Piccoli and Amedeo Spadaro
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Salvador Balle: Department of Physics, University of the Balearic Islands, Spain.
Amedeo Spadaro: Department of Applied Economics, University of the Balearic Islands, Spain.

No 373, Working Papers from ECINEQ, Society for the Study of Economic Inequality

Abstract: The present work studies optimal taxation of labour income when taxpayers are allowed to evade taxes. The analysis is conducted within a general non-linear tax framework, providing a characterisation of the solution for risk-neutral and risk-averse agents. For risk-neutral agents the optimal government choice is to enforce no evasion and to apply the original Mirrlees' rule for the optimal tax schedule. The no evasion condition is precisely determined by a combination of a sufficiently large penalty and a constant auditing probability. Similar results hold for risk-averse agents. Our findings imply that a government aiming at maximizing social welfare should always enforce no evasion and provide simple rules to pursue this objective.

Keywords: Tax evasion; optimal taxation; social welfare. (search for similar items in EconPapers)
JEL-codes: H21 H26 H31 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2015-08
New Economics Papers: this item is included in nep-iue, nep-pbe and nep-pub
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Working Paper: Tax evasion and the optimal non-linear labour income taxation (2015)
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