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Tax policy design in a hierarchical model with occupational decisions

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  • Sebastián Castillo

    (University of Helsinki
    Helsinki Graduate School of Economics
    Finnish Centre of Excellence in Tax Systems Research)

Abstract

This research examines the impact of occupational choices and tax evasion on the tax administration policy in a hierarchical tax model. The economy has two sectors, wage-earners and self-employment, with evasion only possible in the latter. Incorporating occupational decisions produces a smaller marginal tax rate and a larger budget for the IRS. However, the resources are still insufficient to audit all self-employed, resulting in distortions in occupational choices favoring self-employment. These distortions prevent production efficiency from achieving the optimum level, indicating that the Diamond-Mirrlees theorem is not applicable in this context. Finally, applying differential taxation represents a Pareto improvement, but it results in higher taxes for self-employment.

Suggested Citation

  • Sebastián Castillo, 2024. "Tax policy design in a hierarchical model with occupational decisions," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 31(5), pages 1295-1341, October.
  • Handle: RePEc:kap:itaxpf:v:31:y:2024:i:5:d:10.1007_s10797-023-09806-9
    DOI: 10.1007/s10797-023-09806-9
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    More about this item

    Keywords

    Tax evasion; Tax policy; Auditing; Income taxation; Occupational choice; Production efficiency;
    All these keywords.

    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H83 - Public Economics - - Miscellaneous Issues - - - Public Administration

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