Abstract:
Redistributive policies are crucial in tax design but are often overlooked when examining optimal tax administrative policies to fight tax evasion. This paper extends the Keen and Slemrod (2017) framework to analyse how redistributive concerns and inequality aversion affect tax administration. Optimal tax enforcement strategies depend on the connection between private concealment costs and inequality aversion. With social marginal welfare weights falling in income, society chooses less strict enforcement and a larger implied optimal tax gap if concealment costs are relatively high among low-income individuals. Income-dependent enforcement policies also need to account for the impact of these policies on the selection of income-earners to different regimes. When income is taxed in a non-linear fashion, the optimal income tax includes additional considerations arising from concealment costs.
