Optimal Income Taxation With Tax Avoidance and Endogenous Labor Supply
27 Pages Posted: 5 May 2021
Date Written: April 30, 2021
Abstract
We determine the optimal income tax schedule when individuals both choose endogenously their labor supply and have the possibility of avoiding paying taxes. Considering a convex concealment cost function, we propose a formula for the optimal marginal tax rate, that generalizes the standard Mirrlees formula to the case of tax avoidance. We also show that the results obtained by Casamatta (2020) in the fixed income case hold true when labor supply is endogenous: with a low enough marginal cost of avoidance, it is optimal to let some taxpayers, located in the interior of the skill distribution, avoid taxes.
Keywords: tax avoidance, optimal income taxation
JEL Classification: H21, H26
Suggested Citation: Suggested Citation