Optimal Tax Mix and Public Goods Supply Under Multilateral Tax Evasion.

The primary objective of this paper is to analyse the role of evasion possibilities as a determinant of the general structure of commodity and income taxes and of public goods supply. A secondary objective is to provide a defence of differentiated commodity taxes based on the screening role of the purchases of certain goods. Formally, we solve the (constrained) Pareto-efficient commodity and income taxes when both types of taxes can be evaded. We find explicit solutions that readily incorporate the ease with which the transaction may be concealed. Many traditional issues are then (re-)considered, such as (i) the direct versus indirect tax controversy (proposition 1), (ii) uniform versus differential commodity taxes (proposition 2), (iii) regressivity versus progressivity (proposition 3) and (iv) decentralisation versus non-decentralisation of public good supply (proposition 4). We also formulate a modified Samuelson rule that accounts for the impact of tax evasion on the optimal provision of public goods.