Trading Off Tax Distortion and Tax Evasion
25 Pages Posted: 1 Aug 2001
Date Written: June 2001
Abstract
Tax evasion is modeled as a risky activity and integrated into a standard problem of optimal tax design. It is shown that there is a trade off between reducing tax evasion and reducing tax distortion. Thus it is efficient to supplement a broad-based wage tax by a tax on specific consumption if the former is evaded and the latter not. The optimal tax structure can be characterized by an explicit formula.
Keywords: Tax Evasion, Risk-Taking, Optimal Taxation
JEL Classification: H26, H21
Suggested Citation: Suggested Citation
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