Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/223925
Authors: 
Canta, Chiara
Cremer, Helmuth
Gahvari, Firouz
Year of Publication: 
2020
Series/Report no.: 
IZA Discussion Papers No. 13483
Abstract: 
We study optimal income taxation in a framework where one's willingness to report his income truthfully is positively correlated with his type. We show that allowing low-productivity types to cheat leads to Pareto-superior outcomes as compared to deterring them, even if audits can be performed costlessly. When there is no cheating, redistribution takes place on first- and second-best frontiers and can never make low-ability types more well-off than high-ability types. Letting low-ability types cheat allows first-best redistribution up to a limit at which low-ability types are better off than high-ability types.
Subjects: 
optimal taxation
tax evasion
audits
welfare-improving
JEL: 
H20
H21
H26
Document Type: 
Working Paper

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