Optimal Tax Mix and Public Goods Supply Under Multilateral Tax Evasion
Paper number: 99/20
Paper date: July 1999
Paper Category: Discussion Paper
The primary objective of this paper is to analyse the role of evasion possibilities as a determinant of the general structure of commodity and income taxes and of public goods supply. A secondary objective is to provide a defence of differentiated commodity taxes based on the screening role of the purchases of certain goods. Formally, we solve the (constrained) Pareto-efficient commodity and income taxes when both types of taxes can be evaded. We find explicit solutions that readily incorporate the ease with which the transaction may be concealed. Many traditional issues are then (re-)considered, such as (i) the direct versus indirect tax controversy (proposition 1), (ii) uniform versus differential commodity taxes (proposition 2), (iii) regressivity versus progressivity (proposition 3) and (iv) decentralisation versus non-decentralisation of public good supply (proposition 4). We also formulate a modified Samuelson rule that accounts for the impact of tax evasion on the optimal provision of public goods.
JEL Classification Nos: H21, H26, H41
Keywords: Tax mix, tax evasion, public goods, non-linear prices
Corresponding Author: Jean Hindriks, School of Business and Economics, University of Exeter, Streatham Court, Rennes Drive, Exeter, EX4 4PU, UK, tel: (44) 1392 263237, fax (44) 1392 263242, email: Jean.Hindriks@exeter.ac.uk
* I am grateful to Maurice Marchand, Mario Nava, Pierre Pestieau, Jean-Charles Rochet and Fred Schroyen for helpful comments on an earlier version. Of course, they are not responsible for views and errors in this paper.