Optimal Taxation with Costly Enforcement and Evasion

19 Pages Posted: 7 Nov 2007 Last revised: 10 Sep 2010

See all articles by Louis Kaplow

Louis Kaplow

Harvard Law School; National Bureau of Economic Research (NBER)

Date Written: June 1989

Abstract

This paper analyzes the relationship between optimal taxation -- where the literature considers raising revenue with minimum distortion -- and optimal tax enforcement where much of the literature emphasizes raising revenue at the least cost. A central question concerns the extent to which revenue should be raised through higher tax rates, which distort behavior, or greater enforcement, which distorts behavior because it raises marginal effective tax rates and also entails direct resource costs. It is demonstrated that, under each of several assumptions about evasion and enforcement, some expenditure on enforcement is optimal despite its resource cost, its distortionary effect, and the availability of other revenue sources having no enforcement costs. Rules for optimal tax rates and enforcement expenditures are derived, which also indicate the marginal cost of government funds and optimal enforcement priorities for a tax collection agency

Suggested Citation

Kaplow, Louis, Optimal Taxation with Costly Enforcement and Evasion (June 1989). NBER Working Paper No. w2996. Available at SSRN: https://ssrn.com/abstract=463448

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