Welfare‐improving tax evasion

Chiara Canta, Helmuth Cremer and Firouz Gahvari

Scandinavian Journal of Economics, 2024, vol. 126, issue 1, 98-126

Abstract: We study optimal income taxation in a two‐group framework where the private cost of misreporting income is positively correlated with productivity. If high‐wage types always reveal their income truthfully, then letting low‐wage types cheat leads to Pareto‐superior outcomes regardless of the audit costs (as compared to deterrence). With no cheating, redistribution takes place on first‐ or second‐best frontiers and low‐wage types always end up worse off than high‐wage types. Letting low‐wage types misreport reduces the need to recourse to second‐best mechanisms. Additionally, it increases the reach of first‐best redistribution to outcomes at which low‐wage types are better off than high‐wage types.

Date: 2024
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https://doi.org/10.1111/sjoe.12539

Related works:
Working Paper: Welfare-improving tax evasion (2024)
Working Paper: Welfare improving tax evasion (2020)
Working Paper: Welfare Improving Tax Evasion (2020)
Working Paper: Welfare improving tax evasion (2020)
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