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Optimal income taxation without tax evasion

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  • Aronsson, Thomas
  • Xu, Fei

Abstract

This paper incorporates corruption in the tax administration in a Mirrleesian model of optimal income taxation. In a multi-type setting with a discrete ability distribution, we show that the marginal tax structure can be designed to fully offset the incentives to evade taxes. The optimal marginal tax rates reflect two key determinants: the welfare weight the government attaches to each ability type, and how the private cost of tax evasion varies across the income distribution. We also extend the analysis by examining how public expenditures on tax enforcement can serve as a complementary instrument.

Suggested Citation

  • Aronsson, Thomas & Xu, Fei, 2026. "Optimal income taxation without tax evasion," European Economic Review, Elsevier, vol. 186(C).
    • Handle: RePEc:eee:eecrev:v:186:y:2026:i:c:s0014292126000802
    DOI: 10.1016/j.euroecorev.2026.105336
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    Keywords

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    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption

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