Evasion and time inconsistency have been prominent concerns in recent discussions capital income taxation, both theoretical and applied. This paper establishes a link between them, suggesting a potentially useful role for evasion additional to those previously identified: by committing to relatively tax enforcement, the government may be able to alleviate the welfare loss implied by its inability to commit to the tax rate. The scope for this role proves strikingly wide: it is optimal for the government to facilitate the evasion of the capital income taxes that it chooses to impose whenever the time consistent tax rate exceeds that which would be optimal if the government could commit to it.
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Paper provided by Queen's University, Department of Economics in its series Working Papers with number
890.
Find related papers by JEL classification: H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
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