Tax avoidance and the design of the tax structure

Georges Casamatta
ECOPA Working Paper 14, October 2011

In this paper, we study the optimal mix of direct and indirect taxes in the presence of tax avoidance. It is shown that a linear consumption tax is part of the optimal tax scheme, and so even when the assumptions of the Atkinson-Stiglitz theorem are not satisfi ed. The reason is that taxing consumption is a way to tax true income, whereas income taxation only falls on reported income. We also show that, with a weakly separable utility function and linear Engel curves, tax rates should be uniform across goods. With nonlinear Engel curves, which good should be taxed more depends on the comparison of a redistributive and an effi ciency effects.