Working Paper
Trading Off Tax Distortion and Tax Evasion
Wolfram F. Richter, Robin Boadway
CESifo, Munich, 2001
CESifo Working Paper No. 505
CESifo, Munich, 2001
CESifo Working Paper No. 505
Tax evasion is modeled as a risky activity and integrated into a standard problem of optimal tax design. It is shown that there is a trade off between reducing tax evasion and reducing tax distortion. Thus it is efficient to supplement a broad-based wage tax by a tax on specific consumption if the former is evaded and the latter not. The optimal tax structure can be characterized by an explicit formula.
Keywords: Tax evasion, risk-taking, optimal taxation