Welfare Improving Tax Evasion

22 Pages Posted: 28 Jul 2020 Last revised: 16 Aug 2020

See all articles by Chiara Canta

Chiara Canta

Toulouse Business School

Helmuth Cremer

University of Toulouse (GREMAQ & IDEI); Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Firouz Gahvari

University of Illinois at Urbana-Champaign - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Multiple version iconThere are 2 versions of this paper

Date Written: July 2020

Abstract

We study optimal income taxation in a framework where one's willingness to report his income truthfully is positively correlated with his type. We show that allowing low-productivity types to cheat leads to Pareto-superior outcomes as compared to deterring them, even if audits can be performed costlessly. When there is no cheating, redistribution takes place on first- and second-best frontiers and can never make low-ability types more well-off than high-ability types. Letting low-ability types cheat allows first-best redistribution up to a limit at which low-ability types are better off than high-ability types.

Keywords: audits, optimal taxation, tax evasion, welfare-improving

JEL Classification: H20, H21, H26

Suggested Citation

Canta, Chiara and Cremer, Helmuth and Gahvari, Firouz, Welfare Improving Tax Evasion (July 2020). CEPR Discussion Paper No. DP14984, Available at SSRN: https://ssrn.com/abstract=3650097

Chiara Canta (Contact Author)

Toulouse Business School ( email )

20, bd Lascrosses
Toulouse, 31068
France

Helmuth Cremer

University of Toulouse (GREMAQ & IDEI) ( email )

Toulouse, 31000
France
+33 1 6112 8606 (Phone)
+33 1 6112 8637 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Firouz Gahvari

University of Illinois at Urbana-Champaign - Department of Economics ( email )

313 David Kinley Hall, 1407 West Gregory Drive
Urbana, IL 61801
United States

HOME PAGE: http://www.economics.illinois.edu/people/fgahvari

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschingerstr. 5
Munich, DE-81679
Germany

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