SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

Abstract: The traditional avoidance literature undeservedly neglects tax base distribution as a factor affecting the avoidance price, and generally assumed to be equal to the avoidance cost. In reality, avoidance providers are usually either high-skilled specialists or insiders. The strong collusion thus, naturally seems to be an assumption of the behavior of avoidance providers. Within such a framework, income distribution, which forms an avoidance demand together with tax codes, plays a very essential roll for the outcome of both avoidance price and quantity. My article models an economy with a monopolistic avoidance provider and imperfect information, and illustrates possible consequences of tax base changes. The paper examines the relationship between inequality and a government's ability to collect tax revenue, and also considers the possible outcome of a tax base broadening. Furthermore, it provides an additional explanation for the secession decision.

Keywords: Tax avoidance; optimal taxation; income distribution; endogenous prices; inequality; tax base broadening; secession.

JEL-codes: C72; D31; D42; D43; D69; D82; E61; E65; F15; G28; G29; H21; H24; H25; H31; H32; J61; K34; L12; O17

40 pages, First version: July 5, 2001. Revised: December 3, 2001. Earlier revisions: December 3, 2001.

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