Taxation, Compliance, and Clandestine Activities

Subhayu Bandyopadhyay, Sugata Marjit, Santiago Pinto () and Marcel Thum

No 2025-005, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We investigate the delicate balance policymakers have to strike between raising tax revenues for public good provision and controlling the distortionary effects of taxes on (i) tax evasion, (ii) total work hours, and (iii) the allocation of work hours to illegal activities. These distortions lower the constrained optimal tax rate and result in the under-provision of the public good. This under-provision problem is mitigated when surplus from the audit agency is seamlessly transferred to the taxing authorities. Extensions of the basic model incorporate agent heterogeneity and a more general specification of the concealment cost function for infringements.

Keywords: taxation; evasion; compliance; illicit activities; public goods; externalities (search for similar items in EconPapers)
JEL-codes: H2 H4 K10 (search for similar items in EconPapers)
Pages: 83 pages
Date: 2025-03-19
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DOI: 10.20955/wp.2025.005

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