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Trading Off Tax Distortion and Tax Evasion

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Author Info
WOLFRAM F. RICHTER
ROBIN W. BOADWAY

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Abstract

Income tax evasion is modeled as a risky activity and integrated into a standard optimal tax problem in which there is a good whose sales are observable. If the penalty for evasion is proportional to the tax evaded (the Yitzhaki scheme), the optimal tax structure is unaffected by evasion. If the penalty is proportional to unreported income (the Allingham-Sandmo scheme), it is efficient to tax both the observable good and income. The cost of the risk of tax evasion is traded off against the distortion from taxing the observable good. For equal penalties, Allingham/Sandmo is more efficient than Yitzhaki. Copyright 2005 Blackwell Publishing Inc..

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1467-9779.2005.00208.x
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Publisher Info
Article provided by Association for Public Economic Theory in its journal Journal of Public Economic Theory.

Volume (Year): 7 (2005)
Issue (Month): 3 (08)
Pages: 361-381
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Handle: RePEc:bla:jpbect:v:7:y:2005:i:3:p:361-381

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Frank A. Cowell, 1990. "Cheating the Government: The Economics of Evasion," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262532484.
  2. Robin Boadway & Motohiro Sato, 2000. "The Optimality of Punishing Only the Innocent: The Case of Tax Evasion," International Tax and Public Finance, Springer, vol. 7(6), pages 641-664, December. [Downloadable!] (restricted)
  3. Atkinson, A. B. & Stiglitz, J. E., 1976. "The design of tax structure: Direct versus indirect taxation," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 55-75. [Downloadable!] (restricted)
  4. Cremer, Helmuth & Gahvari, Firouz, 1996. "Tax evasion and the optimum general income tax," Journal of Public Economics, Elsevier, vol. 60(2), pages 235-249, May. [Downloadable!] (restricted)
  5. Cremer, Helmuth & Gahvari, Firouz, 1993. "Tax evasion and optimal commodity taxation," Journal of Public Economics, Elsevier, vol. 50(2), pages 261-275, February. [Downloadable!] (restricted)
  6. Chander, Parkash & Wilde, Louis L, 1998. "A General Characterization of Optimal Income Tax Enforcement," Review of Economic Studies, Blackwell Publishing, vol. 65(1), pages 165-83, January. [Downloadable!] (restricted)
  7. Sandmo, Agnar, 1974. "A Note on the Structure of Optimal Taxation," American Economic Review, American Economic Association, vol. 64(4), pages 701-06, September. [Downloadable!] (restricted)
  8. Atkinson, A. B. & Stiglitz, J. E., 1972. "The structure of indirect taxation and economic efficiency," Journal of Public Economics, Elsevier, vol. 1(1), pages 97-119, April. [Downloadable!] (restricted)
  9. Friedrich Schneider & Dominik H. Enste, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March. [Downloadable!] (restricted)
  10. Marhuenda, Francisco & Ortuno-Ortin, Ignacio, 1997. " Tax Enforcement Problems," Scandinavian Journal of Economics, Blackwell Publishing, vol. 99(1), pages 61-72, March. [Downloadable!] (restricted)
  11. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 323-338, November. [Downloadable!] (restricted)
  12. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Blackwell Publishing, vol. 38(114), pages 175-208, April. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Werner Güth & Rupert Sausgruber, 2004. "Tax Morale and Optimal Taxation," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  2. Rainald Borck, 2004. "Income Tax Evasion and the Penalty Structure," Economics Bulletin, Economics Bulletin, vol. 8(5), pages 1-9. [Downloadable!]
  3. Sanjit Dhami & Ali al-Nowaihi, 2007. "Optimal income taxation in the presence of tax evasion: Expected utility versus prospect theory," Discussion Papers in Economics 07/10, Department of Economics, University of Leicester. [Downloadable!]
  4. Robert Ullmann & Christoph Watrin, 2008. "Comparing Direct and Indirect Taxation: The Influence of Framing on Tax Compliance," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 5(1), pages 23-56, June. [Downloadable!]
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