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Optimal capital income taxation with tax evasion


  • D'Andria, Diego


The paper discusses the applicability of optimal taxation theory to source-based capital incomes when significant tax evasion is observed. Without tax evasion a modified Ramsey Rule may reduce distortions brought by international capital mobility, leading to levying differentiated tax rates in domestic sectors inversely proportioned to observed elasticities in terms of capital mobility. The introduction of tax evasion brings additional complexity. The viability of optimal tax rates à la Ramsey is explored, and additional requirement (namely that tax evasion is either very low or very homogeneous) are shown to be necessary in order to allow policy-makers to obtain the tax rates minimizing total excess burden. Results are also provided to solve the optimal taxation objective when tax evasion is a relevant phenomenon and is not homogeneous throughout domestic sectors.

Suggested Citation

  • D'Andria, Diego, 2010. "Optimal capital income taxation with tax evasion," Economics Discussion Papers 2010-27, Kiel Institute for the World Economy (IfW).
  • Handle: RePEc:zbw:ifwedp:201027

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    References listed on IDEAS

    1. Aschauer, David Alan, 1989. "Is public expenditure productive?," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 177-200, March.
    2. Todo, Yasuyuki & Miyamoto, Koji, 2006. "Knowledge Spillovers from Foreign Direct Investment and the Role of Local R&D Activities: Evidence from Indonesia," Economic Development and Cultural Change, University of Chicago Press, vol. 55(1), pages 173-200, October.
    3. Yukon Huang & Alessandro Magnoli Bocchi, 2009. "Reshaping Economic Geography in East Asia," World Bank Publications, The World Bank, number 2590, March.
    4. Hu, Albert Guangzhou, 2007. "Technology parks and regional economic growth in China," Research Policy, Elsevier, vol. 36(1), pages 76-87, February.
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    More about this item


    optimal taxation; capital income taxation; tax evasion;

    JEL classification:

    • 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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