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Tax Systems$
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Joel Slemrod and Christian Gillitzer

Print publication date: 2014

Print ISBN-13: 9780262026727

Published to MIT Press Scholarship Online: May 2014

DOI: 10.7551/mitpress/9780262026727.001.0001

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Optimal Observability and Complexity

Optimal Observability and Complexity

(p.145) 10 Optimal Observability and Complexity
Tax Systems

Joel Slemrod

Christian Gillitzer

The MIT Press

This chapter addresses the issue that many tax system rely on reports made by a private party to the government, which may be inaccurate, wilfully or inadvertently. But the tax authority can directly ascertain information about the tax base other than through taxpayer reports. Even if no reports are required, behavior can be camouflaged to make accurate observation difficult. This chapter develops a formal theoretical model of optimal observability in a linear income tax, and considers how to assess optimal tax complexity in light of how it affects taxpayer decisions given people’s cognitive limitations. It also discusses the political economy of tax complexity.

Keywords:   Observability, Complexity, Cognitive limitations

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