Working Paper: CEPR ID: DP8608
Authors: Georges Casamatta
Abstract: We follow the approach of Grochulski (2007), who determines the optimal income tax schedule when individuals have the possibility of avoiding paying taxes. We however modify his setup by considering a convex concealment cost function. This assumption violates the subadditivity property used in Grochulski (2007) and this has strong implications for the design of the tax schedule. This latter indeed shows that, with subadditivity, all individuals should declare their true income. Tax avoidance is thus not optimal. With a convex cost function, we fi nd 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 fi rst euro is su ciently small. We also provide a characterization of the optimal income tax curve.
Keywords: Fiscal Avoidance; Optimal Income Tax
JEL Codes: H21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| cost of concealment (K42) | tax avoidance (H26) |
| marginal cost of avoidance (D61) | concealment of income (H26) |
| avoidance costs (Q52) | tax concealment behavior (H26) |
| tax avoidance (H26) | reported income (E25) |
| optimal tax rates (H21) | avoidance behavior (D91) |