Abstract
We analyze the optimal combination of direct and indirect taxes in the presence of tax avoidance. Proportional commodity taxes remain part of the optimal tax structure when avoidance is possible, even when the Atkinson–Stiglitz conditions hold. Taxing consumption, despite avoidance, enhances the screening of unobserved productivity relative to income taxation alone. Under weak separability and homothetic subutility, optimal commodity taxes are positive and uniform. With non-homothetic preferences, uniformity may not hold, and the optimal differentiation between luxuries and necessities depends on the distribution of productivity.
Keywords
Optimal taxation; Tax avoidance; Indirect taxation; Atkinson–Stiglitz theorem; Commodity taxation;
JEL codes
- H21: Efficiency • Optimal Taxation
- H26: Tax Evasion
Reference
Georges Casamatta, and Helmuth Cremer, “Tax avoidance and commodity tax differentiation”, Economics Letters, vol. 257, n. 112714, December 2025.
See also
Published in
Economics Letters, vol. 257, n. 112714, December 2025