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Does Evasion Invalidate the Welfare Sufficiency of the ETI?

Author

Listed:
  • Gillitzer Christian

    (Economic Research Department, Reserve Bank of Australia, Sydney, NSW, Australia)

  • Slemrod Joel

    (University of Michigan, Ross School of Business, Ann Arbor, MI, USA)

Abstract

In an influential article, Raj Chetty (2009, “Is the Taxable Income Elasticity Sufficient to Calculate Deadweight Loss? The Implications of Evasion and Avoidance.” American Economic Journal: Economic Policy 1 (2):31–52) argues that in the presence of tax evasion the elasticity of taxable income (ETI) is no longer a sufficient statistic for the marginal efficiency cost of funds (MECF). We show that, under Chetty’s (2009, “Is the Taxable Income Elasticity Sufficient to Calculate Deadweight Loss? The Implications of Evasion and Avoidance.” American Economic Journal: Economic Policy 1 (2):31–52) risk-neutrality assumption, correctly measuring the standard MECF only requires adding detected evasion inclusive of penalties. In the more general case of risk aversion, it further requires amending the formula to address the private risk-bearing cost of tax evasion.

Suggested Citation

  • Gillitzer Christian & Slemrod Joel, 2016. "Does Evasion Invalidate the Welfare Sufficiency of the ETI?," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 16(4), pages 1-10, October.
    • Handle: RePEc:bpj:bejeap:v:16:y:2016:i:4:p:10:n:10
    DOI: 10.1515/bejeap-2016-0093
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    Cited by:

    1. Miguel Almunia & David Lopez-Rodriguez, 2019. "The elasticity of taxable income in Spain: 1999–2014," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 10(3), pages 281-320, November.
    2. Ben Lockwood, 2020. "Malas notches," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(4), pages 779-804, August.
    3. Joel Slemrod, 2024. "What taxpayers, governments and tax economists do – and what they should do," Fiscal Studies, John Wiley & Sons, vol. 45(1), pages 7-19, March.
    4. Gonzalo E. Sánchez, 2022. "Non-compliance notifications and taxpayer strategic behavior: evidence from Ecuador," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 29(3), pages 627-666, June.

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