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Welfare improving tax evasion

Author

Listed:
  • Cremer, Helmuth
  • Canta, Chiara
  • Gahvari, Firouz

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.

Suggested Citation

  • Cremer, Helmuth & Canta, Chiara & Gahvari, Firouz, 2020. "Welfare improving tax evasion," CEPR Discussion Papers 14984, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:14984
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    More about this item

    Keywords

    Optimal taxation; Tax evasion; Audits; Welfare-improving;
    All these keywords.

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • 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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