Public Provision of Private Goods, Self-Selection and Income Tax Avoidance

Published in:

The Scandinavian Journal of Economics 2015

DOI: 10.1111/sjoe.12151

Link to the paper

Abstract:

Redistributive taxation should benefit those with low earnings capacity rather than those who choose a lower income to obtain tax savings. Several contributions have highlighted how public provision of work complements can discourage people from lowering labour supply to diminish taxable income. We show how tax avoidance, previously neglected, can alter the conclusions regarding public provision. Tax avoidance breaks the link between labour supply and reported income. An agent reducing his reported income to escape taxes may no longer forego a publicly provided labour complement because he may now lower his income by avoiding more rather than working less.