Welfare improving tax evasion

Helmuth Cremer, Chiara Canta and Firouz Gahvari

No 14984, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We study optimal income taxation in a framework where one's willingness to report his income truthfully is positively correlated with his type. We show that allowing low-productivity types to cheat leads to Pareto-superior outcomes as compared to deterring them, even if audits can be performed costlessly. When there is no cheating, redistribution takes place on first- and second-best frontiers and can never make low-ability types more well-off than high-ability types. Letting low-ability types cheat allows first-best redistribution up to a limit at which low-ability types are better off than high-ability types.

Keywords: Optimal taxation; Tax evasion; Audits; Welfare-improving (search for similar items in EconPapers)
JEL-codes: H20 H21 H26 (search for similar items in EconPapers)
Date: 2020-07
New Economics Papers: this item is included in nep-acc, nep-iue, nep-mic and nep-pbe
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Related works:
Journal Article: Welfare‐improving tax evasion (2024)
Working Paper: Welfare-improving tax evasion (2024)
Working Paper: Welfare Improving Tax Evasion (2020)
Working Paper: Welfare improving tax evasion (2020)
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