Redistributive policies are crucial in tax design but often overlooked when examining optimal tax administrative policies to fight tax evasion. This paper extends the Keen and Slemrod (2017) framework to analyze how redistributive concerns and inequality aversion affect tax administration. The rule for the optimal redistributive tax has the same structure as in a model without tax evasion, but the efficiency concerns depend on the elasticity of reported incomes, not solely on the elasticity of labour supply. Optimal tax enforcement strategies depend on the connection between private compliance costs and inequality aversion. With social marginal welfare weights falling in income, society chooses less strict enforcement and larger implied optimal tax gap if compliance costs are relatively high among low-income individuals. The results highlight an efficiency-equity trade-off in optimal tax administration policies.

I develop a model of optimal income taxation that incorporates a hybrid employment structure, where formally employed workers receive both recorded wages and payments under the table (PUT). When firms’ choices are not considered, the optimal tax rate depends on two sufficient statistics—the PUT elasticity and the ratio of PUT to reported wages. Higher absolute values of the PUT elasticity and the ratio of PUT to reported wages lower the optimal tax rate. When firms are introduced, the corporate tax creates an additional distortion because PUT wages cannot be deducted from taxable income. As higher PUT wages reduce income tax revenue, they simultaneously increase corporate tax payments, partially offsetting the revenue loss and affecting redistribution. I apply this model to the Peruvian context. To estimate PUT, I perform optimal transport matching between two datasets that most governments already collect—payroll administrative records and household survey data.

Abstract This paper revisits classic results in optimal income taxation by incorporating non-filers, whose undermining the efficacy of income tax-based redistribution. Under Atkinson-Stiglitz preference assumption, the addition of non-filers rationalizes commodity subsidies as an alternative approach to achieving redistribution. The imperfection of this approach may also rationalize differential commodity taxation/subsidization. Moreover, when filing is an endogenous choice—affected by demogrant incentives—the optimal income tax follows a modified ABC rule, with social marginal utility adjusted to reflect imperfect takeup. These findings reveal that accounting for non-filers can increase or decrease optimal redistribution.

We integrate tax enforcement into the Mirrlesian optimal income tax framework, derive sufficient statistics formulas for the jointly optimal tax and enforcement schemes, and establish the following properties: (i) Taxation and enforcement are complementary. (ii) Tax exemptions can be optimal under variable enforcement. (iii) Cost-benefit enforcement is optimal if the marginal social value on consumption of evaders is zero. We calibrate the model using US audit data and find that even a conservative re-alignment of audit intensity at high incomes could lead to a significant increase in optimal top tax rates.