Optimal tax schedules with and without a shadow economy.

Notes: (a) Weakly redistributive social preferences. (b) Moderately redistributive social preferences. (c) Strongly redistributive social preferences. ‘Mirrlees’ stands for a Mirrleesian tax schedule in the model without a shadow economy. ‘Optimal’ stands for the optimal tax schedules in the model with a shadow economy. With moderately redistributive social preferences and the optimal tax schedule, the 50th, 95th, and 99th percentiles of formal income in the model with a shadow economy are approximately $10,000, $41,000, and $79,000, respectively.