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Welfare-improving tax evasion

Author

Listed:
  • Chiara Canta

    (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

  • Helmuth Cremer

    (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

  • Firouz Gahvari

    (UIUC - University of Illinois at Urbana-Champaign [Urbana] - University of Illinois System)

Abstract

We study optimal income taxation in a two-group framework where the private cost of misreporting income is positively correlated with productivity. We show that, if high-wage types always reveal their income truthfully, letting low-wage types cheat would lead to Pareto-superior outcomes regardless of the audit costs (as compared to deterring them). When there is no cheating, redistribution takes place on first- or second-best frontiers with the low-wage types always ending up worse off than the high-wage types. Letting low-wage types conceal their income reduces the need to recourse to second-best mechanisms for redistribution. Additionally, it increases the reach of first-best redistribution to outcomes at which low-wage types are better off than high-wage types.

Suggested Citation

  • Chiara Canta & Helmuth Cremer & Firouz Gahvari, 2024. "Welfare-improving tax evasion," Post-Print hal-04457538, HAL.
    • Handle: RePEc:hal:journl:hal-04457538
    DOI: 10.1111/sjoe.12539
    Note: View the original document on HAL open archive server: https://hal.science/hal-04457538
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    More about this item

    Keywords

    Optimal taxation; Tax evasion; Audits; Welfare-improving; Redistribution;
    All these keywords.

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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