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Working Paper
Taxation, Compliance, and Clandestine Activities
We investigate the delicate balance policymakers have to strike between raising tax revenues for public good provision and controlling the distortionary effects of taxes on (i) tax evasion, (ii) total work hours, and (iii) the allocation of work hours to illegal activities. These distortions lower the constrained optimal tax rate and result in the under-provision of the public good. This under-provision problem is mitigated when surplus from the audit agency is seamlessly transferred to the taxing authorities. Extensions of the basic model incorporate agent heterogeneity and a more general ...
Working Paper
Taxation, Compliance, and Clandestine Activities
We investigate the trade-off policymakers face between raising tax revenues for public good provision and mitigating the distortionary effects of taxation when individuals can evade taxes and allocate work hours between legal and clandestine (illicit) activities. These distortions lower the constrained optimal tax rate and result in the under-provision of the public good. This under-provision problem is mitigated when surplus from the audit agency is seamlessly transferred to the taxing authorities. Extensions of the basic model incorporate agent heterogeneity and a more general specification ...