This article investigates how tax evasion changes the relationship between tax rate, tax revenue, and welfare at the margin. It gives expressions for the marginal tax revenue, the marginal welfare loss, and the marginal cost of public funds and shows that tax evasion may reduce as well as increase the magnitudes of these measures. However, when the taxed good is perfectly inelastic in demand, tax evasion causes marginal cost of public funds to increase and exceed one (its value in the absence of evasion).
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