A note on progression, penalty schemes and tax evasion

Abstract

This note deals with the question of whether shifting the tax base towards more progression will stimulate or discourage tax evasion, when the tax base is shifted so that either the expected tax revenues of government or the expected utility of taxpayer will remain unchanged. The answer turns out to depend sensitively on the nature of penalty schemes if caught in tax evasion. If the penalty rate is charged on the undeclared income, tax evasion will increase, while if the penalty rate is charged on the evaded tax, tax evasion will decrease when the tax base is shifted towards progression.