Optimal Observability in a Linear Income Tax
Joel B. Slemrod
University of Michigan, Stephen M. Ross School of Business; National Bureau of Economic Research (NBER)
Hertie School of Governance; Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods; CESifo (Center for Economic Studies and Ifo Institute)
MPI Collective Goods Preprint, No. 2010/04
We study the optimal observability of the tax base within the standard linear income tax problem, where observability is determined by the government’s investment into the accurate measurement of the tax base. We characterize the optimal level of observability and derive a new expression for the optimal progressivity, which – in addition to the standard equity efficiency trade-off – accounts for the limited accuracy of an income tax system.
Number of Pages in PDF File: 11
Keywords: optimal linear income taxation, observability, tax enforcement
JEL Classification: H21, H11, D8
Date posted: January 11, 2010
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