Tax knowledge and tax manipulation: A unifying model

We provide a unified analysis of taxation and taxpayer education when individuals have an
incomplete understanding of a complex tax system. The analysis is independent of whether
income is earned legitimately, or by avoiding or evading taxes. In this sense, learning about tax
minimization strategies (tax manipulation) is isomorphic to learning about tax rates. The
government in our model balances a trade-off: A better understanding of the tax system
potentially allows taxpayers to optimize more effectively, but also affects government revenue.
Optimal taxpayer education and the optimal amount of redistribution can both be characterized by
aggregate sufficient statistics, which do not require information about how biases or behavioral
responses vary across the decision margins. We provide similarly simple rules for how tax rates
on different income-generating activities should be set relative to each other.