Tax fraud by firms and optimal auditing
AbstractTax fraud is an issue of increasing importance in China. One particularly significant fraud involves excessive claims for the rebate of VAT on exported goods. This fraud has two interesting features. First, it requires the collusion of an intermediary to supply the false documentation that supports a rebate application. Second, the punishment schedule is convex--with capital punishment used in major fraud cases. These features ensure that the payoff function of a firm engaging in fraud is strictly concave in the level of fraud. This gives a well-defined optimization without the need to appeal to risk aversion. We show that the existence of fraud does not affect the real output decision of the firm nor the tax policy of the government. Audit resources can be used to detect firms engaged in fraud as well as the intermediaries who supply false documents. Under reasonable assumptions it is shown that resources should be focused on detecting firms and not intermediaries. Finally, if the government must take action on fraud a convex punishment scheme is shown to be optimal.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal International Review of Law and Economics.
Volume (Year): 30 (2010)
Issue (Month): 1 (March)
Contact details of provider:
Web page: http://www.elsevier.com/locate/irle
Taxation Tax fraud Auditing Punishments;
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Cremer, Helmuth & Gahvari, Firouz, 1993. "Tax evasion and optimal commodity taxation," Journal of Public Economics, Elsevier, vol. 50(2), pages 261-275, February.
- Fedeli, Silvia & Forte, Francesco, 1999. "Joint income-tax and VAT-chain evasion," European Journal of Political Economy, Elsevier, vol. 15(3), pages 391-415, September.
- Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 323-338, November.
- Reinganum, Jennifer F & Wilde, Louis L, 1986. "Equilibrium Verification and Reporting Policies in a Model of Tax Compliance," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(3), pages 739-60, October.
- Kolm, Serge-Christophe, 1973. "A note on optimum tax evasion," Journal of Public Economics, Elsevier, vol. 2(3), pages 265-270, July.
- Virmani, Arvind, 1989. "Indirect tax evasion and production efficiency," Journal of Public Economics, Elsevier, vol. 39(2), pages 223-237, July.
- Friedrich Schneider & Dominik Enste, 1999.
"Shadow Economies Around the World - Size, Causes, and Consequences,"
CESifo Working Paper Series
196, CESifo Group Munich.
- Friedrich Schneider & Dominik Enste, 2000. "Shadow Economies Around the World - Size, Causes, and Consequences," IMF Working Papers 00/26, International Monetary Fund.
- Keen, Michael & Smith, Stephen, 2006.
"VAT Fraud and Evasion: What Do We Know and What Can Be Done?,"
National Tax Journal,
National Tax Association, vol. 59(4), pages 861-87, December .
- Stephen C. Smith & Michael Keen, 2007. "VAT Fraud and Evasion: What Do We Know, and What Can be Done?," IMF Working Papers 07/31, International Monetary Fund.
- Marrelli, Massimo, 1984. "On indirect tax evasion," Journal of Public Economics, Elsevier, vol. 25(1-2), pages 181-196, November.
- Crocker, Keith J. & Slemrod, Joel, 2005.
"Corporate tax evasion with agency costs,"
Journal of Public Economics,
Elsevier, vol. 89(9-10), pages 1593-1610, September.
- Luiz de Mello, 2009. "Avoiding the Value Added Tax," Public Finance Review, , vol. 37(1), pages 27-46, January.
- Sven Stöwhase, 2005.
"Asymmetric Capital Tax Competition with Profit Shifting,"
Journal of Economics,
Springer, vol. 85(2), pages 175-196, 08.
- Stöwhase, Sven, 2004. "Asymmetric Capital Tax Competition with Profit Shifting," Discussion Papers in Economics 454, University of Munich, Department of Economics.
- Yamada, Masatoshi, 1990. "An Analysis of Optimal Taxation with Tax Evasion," Public Finance = Finances publiques, , vol. 45(3), pages 470-90.
- Myles,Gareth D., 1995. "Public Economics," Cambridge Books, Cambridge University Press, number 9780521497695, December.
- Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
- Sven Stö & Christian Traxler, 2005. "Tax Evasion and Auditing in a Federal Economy," International Tax and Public Finance, Springer, vol. 12(4), pages 515-531, August.
- Robin Boadway & Motohiro Sato, 2000. "The Optimality of Punishing Only the Innocent: The Case of Tax Evasion," International Tax and Public Finance, Springer, vol. 7(6), pages 641-664, December.
- Marrelli, M. & Martina, R., 1988. "Tax evasion and strategic behaviour of the firms," Journal of Public Economics, Elsevier, vol. 37(1), pages 55-69, October.
- John Whalley & Li Wang, 2007. "Evaluating the Impure Chinese VAT Relative to a Pure Form in a Simple Monetary Trade Model with an Endogenous Trade Surplus," NBER Working Papers 13581, National Bureau of Economic Research, Inc.
- Keen, Michael & Mintz, Jack, 2004. "The optimal threshold for a value-added tax," Journal of Public Economics, Elsevier, vol. 88(3-4), pages 559-576, March.
- Joshua Aizenman & Yothin Jinjarak, 2008.
"The collection efficiency of the Value Added Tax: Theory and international evidence,"
The Journal of International Trade & Economic Development,
Taylor & Francis Journals, vol. 17(3), pages 391-410.
- Aizenman, Joshua & Jinjarak, Yothin, 2005. "The collection efficiency of the value added tax: theory and international evidence," Santa Cruz Department of Economics, Working Paper Series qt42d103zh, Department of Economics, UC Santa Cruz.
- Joshua Aizenman & Yothin Jinjarak, 2005. "The Collection Efficiency of the Value Added Tax: Theory and International Evidence," NBER Working Papers 11539, National Bureau of Economic Research, Inc.
- Raju Jan Singh & Ben Lockwood & Ehtisham Ahmad, 2004. "Taxation Reforms and Changes in Revenue Assignments in China," IMF Working Papers 04/125, International Monetary Fund.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If references are entirely missing, you can add them using this form.