Tax evasion and optimal commodity taxation

Helmuth Cremer, Firouz Gahvari

Research output: Contribution to journalArticlepeer-review


This paper incorporates tax evasion into Ramsey's optimal taxation problem. It provides (i) a precise and intuitive characterization of the tradeoff between optimal tax rates and audit probabilities, and (ii) a modified version of the 'Ramsey equation'. It also proves that in the presence of tax evasion: (a) the well-known requirement of 'proportional reduction in compensated demands', (b) the traditional result on the optimality of uniform taxation when income is exogenous, and (c) the equivalence of wage and uniform commodity taxes are no longer valid.

Original languageEnglish (US)
Pages (from-to)261-275
Number of pages15
JournalJournal of Public Economics
Issue number2
StatePublished - Feb 1993
Externally publishedYes

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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