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Welfare and Inequality with Hard-to-Tax Markets

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  • Marcelo Arbex
  • Enlinson Mattos
  • Laudo M. Ogura

Abstract

This paper examines welfare implications of hard-to-tax markets, which are endogenously determined by tax enforcement costs. We show that social welfare may be maximized by keeping some markets untaxed, even when it is still possible to collect positive net tax revenues from additional markets. The unequal burden of the tax policy can lead to negative externalities due to the inequality in consumption across individuals. A nonwelfarist planner could restrain taxation to avoid greater inequality, leading to lower provision of the public good. The provision of the public good increases as a welfarist planner chooses to expand the tax reach.

Suggested Citation

  • Marcelo Arbex & Enlinson Mattos & Laudo M. Ogura, 2015. "Welfare and Inequality with Hard-to-Tax Markets," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 71(3), pages 371-384, September.
    • Handle: RePEc:mhr:finarc:urn:sici:0015-2218(201509)71:3_371:waiwhm_2.0.tx_2-o
    DOI: 10.1628/001522108X14364466904583
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    More about this item

    Keywords

    sales tax; tax evasion; hard-to-tax markets; public-good provision;
    All these keywords.

    JEL classification:

    • H1 - Public Economics - - Structure and Scope of Government
    • 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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