Tax Aversion, Optimal Tax Rates, and Indexation

Roger Waud

Public Finance = Finances publiques, 1988, vol. 43, issue 2, 310-25

Abstract: Taking account of the costs of tax evasion and avoidance activity, together with the government's costs of tax enforcement, it is shown that the optimal point on a stylized Laffer curve is located on the positively sloped region, not at the maximum point of the curve. The analysis eschews the usual supply-side-type rationale for the Laffer curve and shows that such a curve can arise solely as a consequence of the optimizing tax aversion activity of a utility maximizing economic agent. The analysis further implies that indexation to inflation may be warranted by considerations of economic efficiency.

Date: 1988
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