Optimal taxation with costly enforcement and evasion
AbstractThis 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
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Public Economics.
Volume (Year): 43 (1990)
Issue (Month): 2 (November)
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Web page: http://www.elsevier.com/locate/inca/505578
Other versions of this item:
- Louis Kaplow, 1991. "Optimal Taxation with Costly Enforcement and Evasion," NBER Working Papers 2996, National Bureau of Economic Research, Inc.
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- 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.
- Joel Slemrod & Shlomo Yitzhaki, 1985.
"The Optimal Size of a Tax Collection Agency,"
NBER Working Papers
1759, National Bureau of Economic Research, Inc.
- Dan Usher, 1986.
"Tax Evasion and the Marginal Cost of Public Funds,"
637, Queen's University, Department of Economics.
- Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production II: Tax Rules," American Economic Review, American Economic Association, vol. 61(3), pages 261-78, June.
- Don Fullerton, 1991. "If Labor is Inelastic, Are Taxes Still Distorting?," NBER Working Papers 2810, National Bureau of Economic Research, Inc.
- Atkinson, Anthony B & Stern, N H, 1974. "Pigou, Taxation and Public Goods," Review of Economic Studies, Wiley Blackwell, vol. 41(1), pages 119-28, January.
- Border, Kim C & Sobel, Joel, 1987. "Samurai Accountant: A Theory of Auditing and Plunder," Review of Economic Studies, Wiley Blackwell, vol. 54(4), pages 525-40, October.
- Reinganum, Jennifer F. & Wilde, Louis L., 1985. "Income tax compliance in a principal-agent framework," Journal of Public Economics, Elsevier, vol. 26(1), pages 1-18, February.
- Cowell, Frank A., 1985. "Tax evasion with labour income," Journal of Public Economics, Elsevier, vol. 26(1), pages 19-34, February.
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