Premium
Trading Off Tax Distortion and Tax Evasion
Author(s) -
RICHTER WOLFRAM F.,
BOADWAY ROBIN W.
Publication year - 2005
Publication title -
journal of public economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.809
H-Index - 32
eISSN - 1467-9779
pISSN - 1097-3923
DOI - 10.1111/j.1467-9779.2005.00208.x
Subject(s) - distortion (music) , economics , tax evasion , evasion (ethics) , observable , microeconomics , indirect tax , income tax , monetary economics , tax reform , public economics , physics , amplifier , immune system , optoelectronics , cmos , quantum mechanics , immunology , biology
Income tax evasion is modeled as a risky activity and integrated into a standard optimal tax problem in which there is a good whose sales are observable. If the penalty for evasion is proportional to the tax evaded (the Yitzhaki scheme), the optimal tax structure is unaffected by evasion. If the penalty is proportional to unreported income (the Allingham–Sandmo scheme), it is efficient to tax both the observable good and income. The cost of the risk of tax evasion is traded off against the distortion from taxing the observable good. For equal penalties, Allingham/Sandmo is more efficient than Yitzhaki.