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Optimal observability in a linear income tax

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  • Joel Slemrod

    (University of Michigan)

  • Christian Traxler

    ()
    (Max Planck Institute for Research on Collective Goods)

Abstract

We study the optimal observability of the tax base within the standard linear income tax problem, where observability is determined by the government’s investment into the accurate measurement of the tax base. We characterize the optimal level of observability and derive a new expression for the optimal progressivity, which – in addition to the standard equity efficiency trade-off – accounts for the limited accuracy of an income tax system.

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File URL: http://www.coll.mpg.de/pdf_dat/2010_04online.pdf
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Bibliographic Info

Paper provided by Max Planck Institute for Research on Collective Goods in its series Working Paper Series of the Max Planck Institute for Research on Collective Goods with number 2010_04.

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Date of creation: Jan 2010
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Handle: RePEc:mpg:wpaper:2010_04

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Keywords: optimal linear income taxation; observability; tax enforcement;

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  1. Emmanuel Saez & Joel B. Slemrod & Seth H. Giertz, 2009. "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review," NBER Working Papers 15012, National Bureau of Economic Research, Inc.
  2. Pestieau, Pierre & Possen, Uri M. & Slutsky, Steven M., 1998. "The value of explicit randomization in the tax code," Journal of Public Economics, Elsevier, vol. 67(1), pages 87-103, January.
  3. Kaplow, Louis, 1998. "Accuracy, Complexity, and the Income Tax," Journal of Law, Economics and Organization, Oxford University Press, vol. 14(1), pages 61-83, April.
  4. Kopczuk, Wojciech, 2001. "Redistribution when avoidance behavior is heterogeneous," Journal of Public Economics, Elsevier, vol. 81(1), pages 51-71, July.
  5. Suzanne Scotchmer & Joel Slemrod, 1988. "Randomness in Tax Enforcement," NBER Working Papers 2512, National Bureau of Economic Research, Inc.
  6. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  7. Reinganum, Jennifer F & Wilde, Louis L, 1988. "A Note on Enforcement Uncertainty and Taxpayer Compliance," The Quarterly Journal of Economics, MIT Press, vol. 103(4), pages 793-98, November.
  8. Dagobert L. Brito & Jonathan H. Hamilton & Steven M. Slutsky & Joseph E. Stiglitz, 1995. "Randomization in Optimal Income Tax Schedules," NBER Working Papers 3289, National Bureau of Economic Research, Inc.
  9. Weiss, Laurence, 1976. "The Desirability of Cheating Incentives and Randomness in the Optimal Income Tax," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1343-52, December.
  10. Martin Hellwig, 2005. "The Undesirability of Randomized Income Taxation under Decreasing Risk Aversion," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2005_27, Max Planck Institute for Research on Collective Goods.
  11. Stern, Nicholas, 1982. "Optimum taxation with errors in administration," Journal of Public Economics, Elsevier, vol. 17(2), pages 181-211, March.
  12. Dixit, Avinash K & Sandmo, Angar, 1977. " Some Simplified Formulae for Optimal Income Taxation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 79(4), pages 417-23.
  13. Scotchmer, Suzanne, 1989. "Who profits from taxpayer confusion?," Economics Letters, Elsevier, vol. 29(1), pages 49-55.
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Cited by:
  1. Traxler, Christian, 2012. "Majority voting and the welfare implications of tax avoidance," Journal of Public Economics, Elsevier, vol. 96(1), pages 1-9.
  2. Stéphane Gauthier & Guy Laroque, 2011. "On the value of randomization," Documents de travail du Centre d'Economie de la Sorbonne 11062r, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne, revised Sep 2012.
  3. Mirco Tonin, 2014. "Reporting import tariffs (and other taxes)," International Tax and Public Finance, Springer, vol. 21(1), pages 153-173, February.

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