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Taxation, Compliance, and Clandestine Activities

Author

Listed:
  • Subhayu Bandyopadhyay
  • Sugata Marjit
  • Santiago Pinto
  • Marcel Thum

Abstract

We investigate the delicate balance policymakers have to strike between raising tax revenues for public good provision and controlling the distortionary effects of taxes on (i) tax evasion, (ii) total work hours, and (iii) the allocation of work hours to illegal activities. These distortions lower the constrained optimal tax rate and result in the under-provision of the public good. This under-provision problem is mitigated when surplus from the audit agency is seamlessly transferred to the taxing authorities. Extensions of the basic model incorporate agent heterogeneity and a more general specification of the concealment cost function for infringements.

Suggested Citation

  • Subhayu Bandyopadhyay & Sugata Marjit & Santiago Pinto & Marcel Thum, 2025. "Taxation, Compliance, and Clandestine Activities," Working Papers 2025-005, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:99706
    DOI: 10.20955/wp.2025.005
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H4 - Public Economics - - Publicly Provided Goods
    • K10 - Law and Economics - - Basic Areas of Law - - - General (Constitutional Law)

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