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Income Taxation and Tax Evasion in a Finite Economy

Listed author(s):
  • Waly Wane

    ()

    (Development Research Group, World Bank)

This paper introduces tax evasion in an optimal income taxation problem. It deals with finite economies. Two different problems are addressed. First, allowing the government to use generalized tax schedules (GTS, income distribution-contingent set of lump sum transfers) `a la Piketty, we show that any first best Pareto optimum can be implemented, by proposing beside the GTS well defined audit strategy and fine function. Second, restricting the government to use classical tax schedules, we show that with the same type of audit strategy and fine function, (only) a subset of the first best Pareto allocations is implementable; moreover, all the agents except the more able evade some income and are not audited.

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Article provided by Society for AEF in its journal Annals of Economics and Finance.

Volume (Year): 3 (2002)
Issue (Month): 2 (November)
Pages: 407-431

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Handle: RePEc:cuf:journl:y:2002:v:3:i:2:p:407-431
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  1. Cremer, Helmuth & Gahvari, Firouz, 1996. "Tax evasion and the optimum general income tax," Journal of Public Economics, Elsevier, vol. 60(2), pages 235-249, May.
  2. Kevin Roberts, 1984. "The Theoretical Limits to Redistribution," Review of Economic Studies, Oxford University Press, vol. 51(2), pages 177-195.
  3. Krasa, Stefan & Villamil, Anne P, 1994. "Optimal Multilateral Contracts," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 4(2), pages 167-187, March.
  4. Cremer, Jacques & McLean, Richard P, 1985. "Optimal Selling Strategies under Uncertainty for a Discriminating Monopolist When Demands Are Interdependent," Econometrica, Econometric Society, vol. 53(2), pages 345-361, March.
  5. Guesnerie, Roger & Seade, Jesus, 1982. "Nonlinear pricing in a finite economy," Journal of Public Economics, Elsevier, vol. 17(2), pages 157-179, March.
  6. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 175-208.
  7. Kim C. Border & Joel Sobel, 1987. "Samurai Accountant: A Theory of Auditing and Plunder," Review of Economic Studies, Oxford University Press, vol. 54(4), pages 525-540.
  8. Dilip Mookherjee & Ivan Png, 1989. "Optimal Auditing, Insurance, and Redistribution," The Quarterly Journal of Economics, Oxford University Press, vol. 104(2), pages 399-415.
  9. Berliant, Marcus & Page, Frank Jr., 1996. "Incentives and income taxation: the implementation of individual revenue requirement functions," Ricerche Economiche, Elsevier, vol. 50(4), pages 389-400, December.
  10. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
  11. Piketty Thomas, 1993. "Implementation of First-Best Allocations via Generalized Tax Schedules," Journal of Economic Theory, Elsevier, vol. 61(1), pages 23-41, October.
  12. Cremer, Jacques & McLean, Richard P, 1988. "Full Extraction of the Surplus in Bayesian and Dominant Strategy Auctions," Econometrica, Econometric Society, vol. 56(6), pages 1247-1257, November.
  13. Egbert Dierker & Hans Haller, 1990. "Tax systems and direct mechanisms in large finite economies," Journal of Economics, Springer, vol. 52(2), pages 99-116, June.
  14. Aumann, Robert J & Kurz, Mordecai, 1977. "Power and Taxes," Econometrica, Econometric Society, vol. 45(5), pages 1137-1161, July.
  15. Berliant, M. & Gouveia, M., 1990. "Incentive Compatible Income Taxation, Individual Revenue Requirements And Welfare," RCER Working Papers 234, University of Rochester - Center for Economic Research (RCER).
  16. Peter J. Hammond, 1979. "Straightforward Individual Incentive Compatibility in Large Economies," Review of Economic Studies, Oxford University Press, vol. 46(2), pages 263-282.
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