Welfare Improving Tax Evasion
22 Pages Posted: 28 Jul 2020 Last revised: 16 Aug 2020
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Welfare Improving Tax Evasion
Date Written: July 2020
Abstract
We study optimal income taxation in a framework where one's willingness to report his income truthfully is positively correlated with his type. We show that allowing low-productivity types to cheat leads to Pareto-superior outcomes as compared to deterring them, even if audits can be performed costlessly. When there is no cheating, redistribution takes place on first- and second-best frontiers and can never make low-ability types more well-off than high-ability types. Letting low-ability types cheat allows first-best redistribution up to a limit at which low-ability types are better off than high-ability types.
Keywords: audits, optimal taxation, tax evasion, welfare-improving
JEL Classification: H20, H21, H26
Suggested Citation: Suggested Citation