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Optimal income taxation with tax avoidance and endogenous labor supply

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  • Georges Casamatta

    (LISA - Lieux, Identités, eSpaces, Activités - UPP - Université Pascal Paoli - CNRS - Centre National de la Recherche Scientifique, TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CNRS - Centre National de la Recherche Scientifique)

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 formula of the standard Mirrlees model to the case of tax avoidance. We also show that the results obtained by Casamatta (2021) 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.

Suggested Citation

  • Georges Casamatta, 2023. "Optimal income taxation with tax avoidance and endogenous labor supply," Post-Print hal-04015963, HAL.
    • Handle: RePEc:hal:journl:hal-04015963
    DOI: 10.1111/caje.12675
    Note: View the original document on HAL open archive server: https://hal.science/hal-04015963
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    References listed on IDEAS

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    Keywords

    Labor supply; Tax avoidance; Optimal income taxation;
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