Markets and Optimal Evadable Taxation

A simple model of indirect taxation, evasion, and enforcement is presentedin which some surprising results emerge. Because of a 'market- thinning' effect of high prices, high taxes lead to multiple equilibria (low-price black markets and high-price legal markets), and black- market comparative statics tend to give the 'wrong' sign. Further, the incentive compatabilityconstraint for tax compliance is shown to confer a kind of concavity on e nforcement costs.