Tax evasion and the optimum general income tax

Helmuth Cremer, Firouz Gahvari

Research output: Contribution to journalArticlepeer-review

Abstract

This paper incorporates tax evasion into an optimum general income tax problem with endogenous labor supply. It posits a two-group model with high-and low-wage individuals to investigate the properties of optimal audit and tax structures. The following main results are obtained. First, high-wage persons are never audited while low-wage persons are audited with a probability strictly less than one. Secondly, high-wage persons should face a zero marginal tax rate. Thirdly, low-wage individuals who have been audited and found innocent should pay a lower tax than those who are not audited. Fourthly, there are two possible tax regimes: low-wage persons face a positive marginal tax rate under one regime and a zero rate under the other. Fifthly, even if honesty cannot be rewarded, the other results of the paper continue to hold.

Original languageEnglish (US)
Pages (from-to)235-249
Number of pages15
JournalJournal of Public Economics
Volume60
Issue number2
DOIs
StatePublished - May 1996

Keywords

  • Optimal taxation
  • Tax evasion

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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