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Title: Welfare improving tax evasion

Author(s): Chiara Canta, Helmuth Cremer and Firouz Gahvari

Publication Date: July 2020

Keyword(s): audits, optimal taxation, tax evasion and welfare-improving

Programme Area(s): Public Economics

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.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14984

Bibliographic Reference

Canta, C, Cremer, H and Gahvari, F. 2020. 'Welfare improving tax evasion'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14984