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Taxation, Compliance, and Clandestine Activities

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 hours between legal and clandestine (illicit) 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 Paper 25-06, Federal Reserve Bank of Richmond.
    • Handle: RePEc:fip:fedrwp:101772
    DOI: 10.21144/wp25-06
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • H40 - Public Economics - - Publicly Provided Goods - - - General
    • K10 - Law and Economics - - Basic Areas of Law - - - General (Constitutional Law)

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