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Wage endogeneity, tax evasion, and optimal nonlinear income taxation
Author(s) -
Gahvari Firouz,
Micheletto Luca
Publication year - 2020
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/jpet.12424
Subject(s) - economics , endogeneity , indirect tax , labour economics , income tax , state income tax , evasion (ethics) , double taxation , optimal tax , tax reform , incentive , monetary economics , microeconomics , public economics , econometrics , biology , immune system , immunology
This paper studies the interaction between tax evasion and wage endogeneity within a Mirrleesian optimal tax framework. It characterizes the optimal marginal income tax rates on the skilled and the unskilled workers and the optimal amount of resources to be spent on deterring tax evasion. It shows that tax evasion weakens the incentives for the government to manipulate the marginal tax rates for the purpose of exploiting general equilibrium effects on wages. Moreover, the extent of this depends on the curvature of the evasion cost function. It also argues that marginal income tax rates are likely to be higher when the government attempts to deter evasion.