Welfare-improving tax evasion

Chiara Canta, Helmuth Cremer, Firouz Gahvari

Research output: Contribution to journalArticlepeer-review


We study optimal income taxation in a two-group framework where the private cost of misreporting income is positively correlated with productivity. If high-wage types always reveal their income truthfully, then letting low-wage types cheat leads to Pareto-superior outcomes regardless of the audit costs (as compared to deterrence). With no cheating, redistribution takes place on first- or second-best frontiers and low-wage types always end up worse off than high-wage types. Letting low-wage types misreport reduces the need to recourse to second-best mechanisms. Additionally, it increases the reach of first-best redistribution to outcomes at which low-wage types are better off than high-wage types.

Original languageEnglish (US)
Pages (from-to)98-126
Number of pages29
JournalScandinavian Journal of Economics
Issue number1
StatePublished - Jan 2024


  • Optimal taxation
  • audits
  • redistribution

ASJC Scopus subject areas

  • Economics and Econometrics


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