Tax Knowledge and Tax Manipulation: A Unifying Model

Abstract

We provide a unified analysis of taxation and taxpayer education when individuals misunderstand complex tax systems. The analysis is independent of whether income is earned legitimately, or by avoiding or evading taxes. In this sense, learning about tax minimization strategies is similar to learning about the tax code. The government balances a trade-off: a better understanding of the tax system allows taxpayers to optimize more effectively, but affects government revenue. Optimal taxpayer education and optimal redistribution are characterized ex post by aggregate sufficient statistics that do not require information about how biases or behavioral responses vary across the decision margins.