Tax Avoidance and Optimal Income Tax Enforcement

Duccio Gamannossi degl’Innocenti, Matthew Rablen


We examine the optimal auditing problem of a tax authority when taxpayers can choose both to evade and avoid. For a convex penalty function, the incentive-compatibility constraints may bind for the richest taxpayer and at a positive level of both evasion and avoidance. The audit function is non-increasing in reported income, and is higher for progressive tax functions than for regressive tax functions. Higher marginal tax rates increase the incentives for non-compliance, overturning the well-known Yitzhaki paradox.

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