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Optimal income taxation with tax avoidance

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  • Georges Casamatta

Abstract

We determine the optimal income tax schedule when individuals have the possibility of avoiding paying taxes. Considering a convex concealment cost function, we find that a subset of individuals, located in the interior of the income distribution, should be allowed to avoid taxes, provided that the marginal cost of avoiding the first euro is sufficiently small. This contrasts with the results of Grochulski who shows that, using a subadditive cost function, all individuals should report their true income. We also provide a characterization of the optimal income tax curve.

Suggested Citation

  • Georges Casamatta, 2021. "Optimal income taxation with tax avoidance," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 23(3), pages 534-550, June.
    • Handle: RePEc:bla:jpbect:v:23:y:2021:i:3:p:534-550
    DOI: 10.1111/jpet.12495
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    References listed on IDEAS

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    Cited by:

    1. Casamatta, Georges & Cremer, Helmuth, 2025. "Tax avoidance and commodity tax differentiation," Economics Letters, Elsevier, vol. 257(C).
    2. Chiara Canta & Helmuth Cremer & Firouz Gahvari, 2024. "Welfare‐improving tax evasion," Scandinavian Journal of Economics, Wiley Blackwell, vol. 126(1), pages 98-126, January.
    3. Georges Casamatta, 2023. "Optimal income taxation with tax avoidance and endogenous labour supply," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 56(3), pages 913-939, August.
    4. Franz Wirl, 2025. "Income Taxation of Privately Informed Agents by a Leviathan Government," Homo Oeconomicus: Journal of Behavioral and Institutional Economics, Springer, vol. 42(1), pages 43-63, November.
    5. Sebastián Castillo, 2024. "Tax policy design in a hierarchical model with occupational decisions," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 31(5), pages 1295-1341, October.
    6. Siqi Wang & Jun-ichi Itaya, 2023. "Optimal tax design with costly tax evasion," Economics Bulletin, AccessEcon, vol. 43(3), pages 1271-1278.

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