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Increasing returns-to-Scale Evasion Technologies and Optimal Commodity Taxation

Kimberley Scharf

The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics

Abstract: This paper examines the implications of increasing returns-to-scale evasion technologies for the optimal structure of commodity taxes. We find that, in the presence of evasion, tax design should aim at inducing uniform marginal evasion responses across commodities. This objective may dominate the concerns over inter-commodity distortions stressed by the traditional optimal commodity taxation literature. The resulting optimal tax structure can thus be more, or less, uniform than the one prescribed in the absence of evasion, even when uniform commodity tax is feasible. In particular, our results imply that the presence of evasion may yield an optimal tax structure which features relatively low tax rates on commodities that have relatively low price elasticities of demand, if the demand for those commodities is relatively large. On the other hand, when all transactions are of similar size, the presence of evasion may provide a rationale for broad-based uniform taxation.

Keywords: Optimal Taxation; Tax Evasion (search for similar items in EconPapers)
JEL-codes: H21 H26 (search for similar items in EconPapers)
Date: 1994
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Persistent link: https://EconPapers.repec.org/RePEc:wrk:warwec:425

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