An evasive topic: theorizing about the hidden economy

This paper reviews some central issues that arise in theorizing about tax evasion decisions and the hidden economy. It starts from the Allingham and Sandmo (J. Public Econ. 1:323–338, 1972) modeling of the tax evasion decision as a choice under uncertainty based on expected utility maximization and risk aversion. It goes on to discuss alternative specifications of the taxpayer’s preferences with particular regard to the explanation of the extensive margin, i.e. the decision on whether or not to engage in tax evasion. It extends the model to the case of variable labor supply with work in both official and black labor markets. It then considers the application of the theory to taxes on wealth and income from capital, indirect tax evasion, and smuggling. It also includes a consideration of general equilibrium effects and of the problems that evasion causes for the theory of optimal income and commodity taxes. It concludes with a brief discussion of the implications of tax evasion for economic policy in the welfare state.     

A fundamental externality in the labour market? Ragnar Frisch on the socially optimal amount of work

In the late 1940s, Ragnar Frisch published two articles in Norwegian that constitute a pioneering attempt to apply welfare economics to a problem of economic policy. The main contention of the articles is that there exists a fundamental externality in the labour market because the marginal productivity of labour depends both on input in the individual unit and on total labour use in the economy. While inspired by the problems of post-war reconstruction, Frisch came to regard it as a general problem in a decentralized economy, and he explores its consequences for wage and tax policy. While Frisch attached great importance to the analysis, it has received little attention in the subsequent literature.     

Uncertainty in the Theory of Public Finance

This paper discusses the role that the economics of uncertainty has played in the theory of public finance. From being mostly concerned with its choice-theoretic foundations in the 1950s and 1960s, the theory of expected utility maximisation and risk averse behaviour has contributed decisively to the development of several areas of the theory of public finance. Three of these have been chosen here to illustrate the general point: The theory of taxation and risk taking with focus on portfolio choice, the role of uncertainty in public expenditure analysis (emphasising the effect of public goods provision on private risk taking) and the theory of tax evasion and compliance.     

Redistribution and the marginal cost of public funds

Discussions of the marginal cost of public funds with distortionary taxation are often cast in the framework of a one-consumer economy, while the main justification of distortionary taxes is that they are needed for redistribution. This paper analyzes the issue in a model with heterogeneous consumers and a linear income tax, focusing on the tradeoff between labour market distortions and the redistribution from high-wage to low-wage workers. In an optimal tax system the MCF will be the same for all sources of funds and under certain assumptions less than one. Without optimality the MCF will in general differ between different sources of finance.     

Buchbesprechungen

Ohne Zusammenfassung     

Taxation, Migration, and Pollution

This paper analyzes optimal fiscal, environmental and immigration policy for a single jurisdiction. In the presence of immigration quotas, taxes on the output of externality-producing industries should be higher than indicated by the standard rule for Pigovian corrective taxation. Immigration quotas are not optimal if fiscal instruments can be used to control immigration, and relaxation of immigration quotas generally increases domestic welfare. If optimal taxes are imposed on immigrants, no immigration quota should be imposed, and a version of the traditional Pigovian rule characterizes optimal taxation of domestic externalities. If production in the immigrants' country of origin causes trans-boundary spillovers, domestic welfare can be improved by lighter taxation of immigrants or by further relaxation of immigration quotas. This revised version was published online in July 2006 with corrections to the Cover Date.     

A note on the neutrality of the cash flow corporation tax

The cash flow tax has been widely recommended as a form of taxing corporate income which is neutral with respect to investment decisions. This note points out that the claim is valid only under the assumption that the tax rate is constant over time. By contrast, an ‘ideal’ profits tax is neutral whatever the time shape of the tax rate.