Optimal sales tax rebates and tax enforcement consumers

Abstract

This article incorporates tax evasion and sales tax rebates to consumers into Ramsey's optimal taxation problem. Consumers may act as tax enforcers by requesting sales receipts, forcing firms to remit taxes to the government. Consumer auditing is costly, and the government offers buyers a tax rebate. This policy modifies the traditional 'Ramsey equation' due to a non-trivial income effect. We show that tax enforcement policies affect buyers' allocations directly via the standard changes in the good's price. We characterize the planner's policy trade-off when choosing alternative enforcement instruments. We illustrate numerically the relevance of the individuals' auditing and firms' concealment technologies for the determination of optimal policies and show that the economy's welfare is higher when the government has two auditing policies at its disposal vis-A -vis direct auditing only.