Taxation with Costly Administration

Abstract

The concept of a tax technology is used here as providing a unified framework for analyzing both administrative activity by tax authorities and tax-resisting activity by taxpayers. This framework provides a simple formalization of Adam Smith's four components of tax costs: administration, substitution, active noncompliance, and passive compliance. The model is used to derive policy implications concerning the proper measurement of the cost of public funds and concerning the criterion for optimal administration.