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Poverty, Tax Evasion And The Optimum General Income Tax

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  • Enlinson Henrique Carvalho Mattos

Abstract

This paper combines poverty considerations in the social welfare function and tax evasion into an optimal general income tax problem. It investigates the optimal audit and tax structures using a model with two types of individual, endogenous labor supply and a hybrid social welfare function that captures the pluralism of the objectives of a full committed government. The results confirm the previous literature on tax evasion: (i) skilled households should never be audited and face any distortions in the labor supply, (ii) unskilled households have to be audited randomly (probability less than one) and (iii) Individuals should be rewarded if telling the truth about their income. In addition, the introduction of poverty concern as a negative externality brings new characteristics for the optimum income tax on poor: (iv) they may (or not) face negative marginal income tax. Also, a numerical example is provided to further explore the model.

Suggested Citation

  • Enlinson Henrique Carvalho Mattos, 2005. "Poverty, Tax Evasion And The Optimum General Income Tax," Anais do XXXIII Encontro Nacional de Economia [Proceedings of the 33rd Brazilian Economics Meeting] 044, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    • Handle: RePEc:anp:en2005:044
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    JEL classification:

    • H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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