Optimal Income Taxation With Tax Avoidance and Endogenous Labor Supply

Canadian Journal of Economics/Revue canadienne d'économique, volume 56, issue 3, 2023[10.1111/caje.12675]

27 Pages Posted: 5 May 2021 Last revised: 28 Feb 2025

See all articles by Georges Casamatta

Georges Casamatta

University of Corsica; University of Toulouse 1 - Toulouse School of Economics (TSE)

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

Casamatta, Georges, Optimal Income Taxation With Tax Avoidance and Endogenous Labor Supply (April 30, 2021). Canadian Journal of Economics/Revue canadienne d'économique, volume 56, issue 3, 2023[10.1111/caje.12675], Available at SSRN: https://ssrn.com/abstract=3837351 or http://dx.doi.org/10.1111/caje.12675

Georges Casamatta (Contact Author)

University of Corsica ( email )

Corte
France

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

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