Working Paper: CEPR ID: DP14984
Authors: Chiara Canta; Helmuth Cremer; Firouz Gahvari
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.
Keywords: optimal taxation; tax evasion; audits; welfare-improving
JEL Codes: H20; H21; H26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tax evasion (H26) | Welfare outcomes (I38) |
| Allowing low-productivity types to cheat on taxes (H26) | Pareto superior outcomes (D69) |
| No cheating (Z28) | Redistribution along first and second-best frontiers (H21) |
| Permitting low-ability types to cheat (C92) | First-best redistribution (H21) |
| Allowing evasion (H26) | No utility loss from evasion (H26) |
| Auditing (M42) | Harm welfare outcomes (I30) |