“Optimal income taxation under informal consumption”

Abstract

This paper explores the optimal structure of the income tax schedule in the United States, considering factors such as private insurance and tax avoidance. The analysis reveals that tax avoidance mechanisms contribute to the observed regressivity at the top of the income distribution. Wealthier households engage in more avoidance, reducing their labor income taxes. The introduction of tax avoidance also alters the optimal income tax progressivity, with an omniscient planner allowing for increased progressivity, while a myopic planner suggests minimal changes, unaware of avoidance’s impact on aggregate production.