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Optimal income taxation with tax avoidance

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  • Casamatta, Georges

Abstract

We follow the approach of Grochulski (2007), who determines the optimal income tax schedule when individuals have the possibility of avoiding paying taxes. We however modify his setup by considering a convex concealment cost function. This assumption violates the subadditivity property used in Grochulski (2007) and this has strong implications for the design of the tax schedule. This latter indeed shows that, with subadditivity, all individuals should declare their true income. Tax avoidance is thus not optimal. With a convex 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 suciently small. We also provide a characterization of the optimal income tax curve.

Suggested Citation

  • Casamatta, Georges, 2011. "Optimal income taxation with tax avoidance," CEPR Discussion Papers 8608, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:8608
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    References listed on IDEAS

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    1. Emmanuel Saez & Joel Slemrod & Seth H. Giertz, 2012. "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 50(1), pages 3-50, March.
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    Keywords

    fiscal avoidance; optimal income tax;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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