Working paper

Welfare improving tax evasion

Chiara Canta, Helmuth Cremer, and Firouz Gahvari


We study optimal income taxation in a framework where one's willingness to report his income truthfully is positively correlated with his type. We show that allowing low-productivity types to cheat leads to Pareto-superior outcomes as compared to deterring them, even if audits can be performed costlessly. When there is no cheating, redistribution takes place on first- and second-best frontiers and can never make low-ability types more well-off than high-ability types. Letting low-ability types cheat allows first-best redistribution up to a limit at which low-ability types are better off than high-ability types.


Optimal taxation, tax evasion, audits, welfare-improving.;

JEL codes

  • H20: General
  • H21: Efficiency • Optimal Taxation
  • H26: Tax Evasion


Chiara Canta, Helmuth Cremer, and Firouz Gahvari, Welfare improving tax evasion, TSE Working Paper, n. 20-1121, July 2020.

See also

Published in

TSE Working Paper, n. 20-1121, July 2020