Income Inequality, Tax Progressivity and Tax Optimization Industry

This paper investigates the relationship between tax base distribution and tax collection rate. We approach the tax collection problem using traditional industrial organization tools. Thus, we model the tax optimization industry and investigate the impact of the change in aggregate demand on the price setting which, in turn, affects the number of tax payers. It is found that lower income inequality as well as a less progressive tax code may result in a decreasing number of tax payers. Furthermore, we criticize the reduction in the highest tax rate as the policy for tax collection improvement