Optimal Tax Enforcement

The question of optimal tax enforcement by revenue authorities has received relatively little attention. This chapter examines the joint problem of the optimal tax rate and optimal tax enforcement in an income tax context. This combines the elasticity of taxable income with an `enforcement elasticity of taxable income', defined with respect to an enforcement parameter that influences the cost of income concealment faced by individuals. Individuals maximises utility by making a choice about labour supply and the amount of income to conceal from the tax authorities, while the government selects the tax rate and an enforcement parameter to maximise a social welfare function displaying an explicit redistributive objective. The way in which the optimal compliance gap, defined as the proportional difference between the tax that should legally be paid and the amount actually paid, is affected by labour supply responses to tax enforcement is also examined.