Welfare-improving tax evasion

Chiara Canta (), Helmuth Cremer and Firouz Gahvari
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Chiara Canta: TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement

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Abstract: We study optimal income taxation in a two-group framework where the private cost of misreporting income is positively correlated with productivity. We show that, if high-wage types always reveal their income truthfully, letting low-wage types cheat would lead to Pareto-superior outcomes regardless of the audit costs (as compared to deterring them). When there is no cheating, redistribution takes place on first- or second-best frontiers with the low-wage types always ending up worse off than the high-wage types. Letting low-wage types conceal their income reduces the need to recourse to second-best mechanisms for redistribution. Additionally, it increases the reach of first-best redistribution to outcomes at which low-wage types are better off than high-wage types.

Keywords: Optimal taxation; Tax evasion; Audits; Welfare-improving; Redistribution (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-acc, nep-iue, nep-pbe and nep-pub
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Published in Scandinavian Journal of Economics, 2024, 126 (1), pp.98-126. ⟨10.1111/sjoe.12539⟩

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Related works:
Journal Article: 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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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04457538

DOI: 10.1111/sjoe.12539

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