Optimal income taxation with tax avoidance

Georges Casamatta (1)

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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.

Domaines: Economies et finances

Georges Casamatta. Optimal income taxation with tax avoidance. Journal of Public Economic Theory, 2021, ⟨10.1111/jpet.12495⟩. ⟨hal-03089241⟩