Optimal taxation, imperfect competition and tax enforcement policies

This thesis contains four papers in the area of Public Economics. Chapter 1 looks at producers' taxation in a model of vertically related oligopolies. Both ad valorem and specific taxes are considered and formulae expressing their effects on prices and profits are derived, showing how these depend on factors such as demand conditions, technology and market structure. Conditions for taxation to cause price overshifting and to raise profits are given. Also, tax instruments are compared in terms of the amount of revenue collected and the effect on the price for the final good. Chapter 2 applies the results of the previous paper to the analysis of tax reforms. Vertically related oligopolies result in welfare loss for two reasons. Firstly, upstream oligopolists set the price of the intermediate good above marginal cost and this causes aggregate production inefficiency. Secondly, downstream oligopolists introduce an additional price-cost margin. The analysis focuses on tax reforms, where the government aims at reducing the welfare loss by levying taxes and subsidies on producers while raising no revenue. Chapter 3 focuses on the design of income tax enforcement policies in a principalagent framework. The existing literature assumes risk neutral taxpayers while this chapter considers the case of risk averse agents by assuming a kinked linear utility function. When individuals have the same attitude towards risk, it is shown that the optimal policy is such that income reports below a given threshold are audited at the probability level just sufficient to induce truthful reporting, whereas those above it are not audited. This makes the effective tax schedule to be quite regressive. Instead, if attitudes towards risk vary across taxpayers, the numerical results show that the optimal audit policy causes only a limited regressive bias, for income reports above the threshold meet a positive probability of audit. Chapter 4 examines the Presumptive Income Coefficients (PIC) audit policy, a scheme recently introduced in the Italian tax code and aimed at reducing tax evasion in the non-corporate sector. The tax agency applies the PIC to observable production costs to get an estimate of taxpayer's income, or presumptive income. The probability of audit is then dependent on the gap between presumptive and reported income. This issue is examined in a setting where the game between the taxing authority and taxpayers is modelled in a principal-agent framework.