Welfare and Inequality with Hard-to-Tax Markets

Marcelo Arbex, Enlinson Mattos and Laudo Ogura

FinanzArchiv: Public Finance Analysis, 2015, vol. 71, issue 3, 371-384

Abstract: This paper examines welfare implications of hard-to-tax markets, which are endogenously determined by tax enforcement costs. We show that social welfare may be maximized by keeping some markets untaxed, even when it is still possible to collect positive net tax revenues from additional markets. The unequal burden of the tax policy can lead to negative externalities due to the inequality in consumption across individuals. A nonwelfarist planner could restrain taxation to avoid greater inequality, leading to lower provision of the public good. The provision of the public good increases as a welfarist planner chooses to expand the tax reach.

Keywords: sales tax; tax evasion; hard-to-tax markets; public-good provision (search for similar items in EconPapers)
JEL-codes: H1 H21 H26 (search for similar items in EconPapers)
Date: 2015
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Working Paper: Welfare and Inequality with Hard-to-Tax Markets (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:mhr:finarc:urn:sici:0015-2218(201509)71:3_371:waiwhm_2.0.tx_2-o

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DOI: 10.1628/001522108X14364466904583

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