This paper characterizes optimal policies in the presence of tax evasion and undocumented workers. In equilibrium, domestic workers may work exclusively in the formal sector or also in the informal sector. Surprisingly, in equilibrium, wages are always equalized between domestic and undocumented...

This paper analyzes optimal linear commodity taxes joint with non-linear income taxes. We provide optimal tax rules based on empirically observable elasticities, earnings and commodity demands. We demonstrate that commodities should be taxed/subsidized if – conditional on earnings – doing so...