Tax avoidance hampers optimal income taxation, limiting government revenue for redistribution.
The article explores how to design the best income tax system when people can hide their income to avoid taxes. The researchers use a framework called the Mirrlees approach to figure out the optimal way to tax income. They find that if the tax rate on a certain income level is higher than the cost to hide that income, people will choose to hide some of their income to pay less tax. This limits the government's ability to raise tax revenue for redistribution.