Davidson, C., Martin, L. and Wilson, J. (2005) ‘Tax Evasion as an Optimal Tax Device’, Economics Letters, Vol. 86, pp. 285-289

- An economy where all goods are taxed at the same rate- Conditions under which firms self-select into a black market such that effective taxation is

closer to an optimal discretionary tax system

- The use of an ‘underground economy’ or black market is argued to potentially improve welfare as it allows some economic activities to be taxed at lower rates than others, consistent with optimal tax rules.

- This is investigated with the introduction of a black market into an economy where goods are all taxed at the same rate and the paper presents conditions under which the black market moves the economy closer to an optimal discriminatory tax policy.