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Alejandro Forcades
''The optimal tax mix with underground labor''
( 2019, Vol. 39 No.1 )
The optimal mix between capital, labor and consumption taxes is derived in a model with underground labor. The Ramsey planner, which is limited by the trade-off between declared and underground labor, sets the tax rate on labor income equal to zero in order to get rid off the issue of tax evasion; so, in contrast to Coleman (2000), subsidizing labor is not optimal. This paper also points out that adding consumption taxation to the model of Correia (1992) makes the Chamley-Judd result of a zero capital tax in the long run hold even when there are restrictions on the taxation of labor; in fact, the optimal tax rate on capital income is always zero. Since consumption taxes are positive and constant for each period, I provide an alternative argument to shift the whole tax burden from income to consumption.
Keywords: optimal dynamic taxation, underground economy, consumption taxes
JEL: H2 - Taxation, Subsidies, and Revenue: General
E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General
Manuscript Received : Jun 05 2018 Manuscript Accepted : Feb 02 2019

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