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Optimal income taxation with tax avoidance

Author

Listed:
  • George Casamatta

    (Laboratoire Lieux, Identités, eSpaces et Activités (LISA))

Abstract

We determine the optimal income tax schedule when individuals have the possibility of avoiding paying taxes. Considering a convex concealment cost function, we find that a subset of individuals, located in the interior of the income distribution, should be allowed to avoid taxes, provided that the marginal cost of avoiding the first euro is sufficiently small. This contrasts with the results of Grochulski (2007) who shows that, with a subadditive cost function, all individuals should declare their true income. We also provide a characterization of the optimal income tax curve.

Suggested Citation

  • George Casamatta, 2020. "Optimal income taxation with tax avoidance," Working Papers 015, Laboratoire Lieux, Identités, eSpaces et Activités (LISA).
    • Handle: RePEc:lia:wpaper:015
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    File URL: https://umrlisa.univ-corse.fr/RePEc/lia/pdf/WorkingPaper15.pdf
    File Function: First version, 2020
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    More about this item

    Keywords

    fiscal avoidance; optimal income tax;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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