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Public Good Provision, Tax Evasion, and Illicit Production

Author

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

Abstract

We investigate the trade-off policymakers face between raising tax revenues for public good provision and mitigating the distortionary effects of taxation when individuals can evade taxes and allocate work time between legal and illicit activities. These distortions lower the constrained optimal tax rate and lead to the under-provision of the public good. This under-provision problem is mitigated when surplus generated by the audit agency is seamlessly transferred to the taxing authorities. Extensions of the basic model allow the government to endogenously choose the audit intensity as part of the tax enforcement policy, introduce agent heterogeneity, and consider a more general concealment cost function.

Suggested Citation

  • Subhayu Bandyopadhyay & Sugata Marjit & Santiago Pinto & Marcel Thum, 2025. "Public Good Provision, Tax Evasion, and Illicit Production," Working Papers 2025-005, Federal Reserve Bank of St. Louis, revised 14 Jun 2026.
    • 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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