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Siqi Wang and Jun-ichi Itaya
''Optimal tax design with costly tax evasion''
( 2023, Vol. 43 No.3 )
This paper extends the Atkinson-Stiglitz analysis to a dynamic overlapping generations model, incorporating the realistic assumption that agents can evade labor income taxes by misreporting their true income. They can do so by incurring both non-monetary and monetary costs, which are distinguished in the paper and shown to have different implications for optimal tax policies. By considering the monetary cost as a deferred payment, the paper shows that tax evasion concerns can render the well-known Atkinson-Stiglitz theorem invalid and provides critical insights into how different types of costs affect tax schedules.
JEL: H2 - Taxation, Subsidies, and Revenue: General
H3 - Fiscal Policies and Behavior of Economic Agents: General
Manuscript Received : Apr 02 2023 Manuscript Accepted : Sep 30 2023

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