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A New Look at the Laffer Curve and the Displacement Loss from Tax Evasion

Author

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  • Filip Palda

    (Ecole nationale d'administration publique in Montreal)

Abstract

The two most prominent deadweight losses in public finance are the triangle loss from taxation and the rectangle loss from rent-seeking. This paper suggests that a third type of deadweight loss can rival these two in size and deserves detailed exploration. In the presence of the underground economy taxes give rise to a deadweight loss from displacement of efficient producers by inefficient producers. I consider an economy in which a producer faces two types of costs: the cost of production, and taxes. If good evaders are inefficient producers, tax evasion turns a flat tax into a tax based on ability to pay with the result that maximum government revenues possible under tax evasion may be larger than when no one evades taxes. Displacement deadweight loss is a subset of a larger class of losses that arise when productive and counterproductive features are bundled into the same economic agent and when that agent has no incentive or opportunity to specialize wholly in one or the other pursuit.

Suggested Citation

  • Filip Palda, 2001. "A New Look at the Laffer Curve and the Displacement Loss from Tax Evasion," Public Economics 0111006, EconWPA.
  • Handle: RePEc:wpa:wuwppe:0111006
    Note: Type of Document - PDF; prepared on IBM PC ; to print on HP/PostScript/; pages: 37; figures: included. PDF document. Can be viewed or printed.
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/pe/papers/0111/0111006.pdf
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    References listed on IDEAS

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    1. repec:mes:challe:v:28:y:1985:i:4:p:50-53 is not listed on IDEAS
    2. Slemrod, Joel & Yitzhaki, Shlomo, 2002. "Tax avoidance, evasion, and administration," Handbook of Public Economics,in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 22, pages 1423-1470 Elsevier.
    3. Heckman, James J & Honore, Bo E, 1990. "The Empirical Content of the Roy Model," Econometrica, Econometric Society, vol. 58(5), pages 1121-1149, September.
    4. Filip Palda, 1998. "Evasive Ability and the Efficiency Cost of the Underground Economy," Canadian Journal of Economics, Canadian Economics Association, vol. 31(5), pages 1118-1138, November.
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    Cited by:

    1. Jan Hanousek & Filip Palda, 2009. "Is there a displacement deadweight loss from tax evasion? Estimates using firm surveys from the Czech Republic," Economic Change and Restructuring, Springer, vol. 42(3), pages 139-158, August.

    More about this item

    Keywords

    underground economy; tax evasion; deadweight loss; taxation;

    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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