The Effects of Taxation on Income-Producing Crimes with Variable Leisure Time

Abstract

The existing literature on the effects of taxation on income-producing crimes lays claim to several important implications: first, that a pure income tax regime maintains the (efficient) level of crime with respect to risk neutral offenders; second, that the current U.S. income tax laws under which legal and criminal income are taxable but fines are nondeductible reduce crime unambiguously; third, that a shift from a pure income tax to the current U.S. income tax laws also reduce crime. The papers obtaining these results assume implicitly or explicitly that leisure time is fixed. The purpose of this note is to examine the robustness of these results when leisure time can vary. It is shown that unless some strong restrictions are imposed on the utility function no clear results can be obtained. But if offenders are risk neutral and the utility function is separable, then a pure income tax regime will reduce both legal and criminal activities, while the current U.S. income tax laws will reduce crime, but they will have an ambiguous effect on work. In addition, a shift from a pure income tax regime to the current U.S. income tax laws will have its expected effect of reducing crime.