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Welfare and Inequality with Hard-to-Tax Markets

Author

Listed:
  • Marcelo Arbex

    (Department of Economics, University of Windsor)

  • Enlinson Mattos

    (São Paulo School of Economics, Getulio Vargas Foundation)

  • Laudo M. Ogura

    (Economics Department, Grand Valley State University)

Abstract

Tax enforcement costs constrain the government's ability to observe economic activities, giving rise to hard-to-tax (HTT) markets. In this paper, we develop a Hotelling-type spatial model of sales taxation to analyze the welfare and distributional effects of the existence of HTT transactions. We show that an economy with HTT markets suffers from lower provision of public goods not only due to higher marginal cost of taxation, but also because (i) the planner might be concerned about the inequality in consumption caused by the unequal taxation across markets and (ii) the tax base might be over-extended to allow for a more inclusive taxation.

Suggested Citation

  • Marcelo Arbex & Enlinson Mattos & Laudo M. Ogura, 2014. "Welfare and Inequality with Hard-to-Tax Markets," Working Papers 1403, University of Windsor, Department of Economics.
    • Handle: RePEc:wis:wpaper:1403
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    References listed on IDEAS

    as
    1. Kanbur, Ravi & Keen, Michael & Tuomala, Matti, 1994. "Optimal non-linear income taxation for the alleviation of income-poverty," European Economic Review, Elsevier, vol. 38(8), pages 1613-1632, October.
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    7. Arbex Marcelo & Mattos Enlinson & Trudeau Christian, 2012. "Poverty, Informality and the Optimal General Income Tax Policy," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 12(1), pages 1-22, July.
    8. Marcelo Arbex & Enlinson Mattos, 2015. "Optimal sales tax rebates and tax enforcement consumers," Oxford Economic Papers, Oxford University Press, vol. 67(2), pages 479-493.
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    More about this item

    Keywords

    Sales tax; Tax evasion; Hard-to-tax markets; Public good provision.;
    All these keywords.

    JEL classification:

    • H1 - Public Economics - - Structure and Scope of Government
    • 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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