Certain effects of random taxes

•Examines the effects of tax rate randomness on profitability and economic activity.•Identifies circumstances in which revenue-neutral tax rate variability reduces deadweight loss.•Shows that with heterogenous taxpayers tax rate variability inherently reduces deadweight loss.•Establishes that efficiency-enhancing tax rate randomness can reduce efficient spending levels. This paper explores the implications of tax rate randomness, identifying circumstances in which revenue-neutral rate variability increases profitability, economic activity, and the efficiency of resource allocation. Furthermore, with heterogeneous taxpayers, tax rate variability is shown to perform an efficiency-enhancing screening function, imposing heavier expected tax burdens on less responsive taxpayers. And while efficient tax randomness enables governments to reduce average costs of taxation, it necessarily increases the marginal cost of taxation over some ranges of expected revenue, so may reduce efficient levels of government spending.