Optimal self-employment income tax enforcement
AbstractMost models of optimal income tax enforcement assume that income is either random or solely remunerates labor, neglecting that auditing strategies may depend on observable inputs. This paper outlines a model to optimally monitor self-employed entrepreneurs when, in addition to reported profits, the tax collection agency also observes the number of workers employed (or any other input variable) at each firm. We show that, by conditioning the monitoring strategy only on labor input, it is optimal for the IRS to audit firms in a way that generates some empirical regularities, like the missing middle. We also show that the optimal direct mechanism can be implemented by an indirect monitoring strategy that is consistent with actual IRS practices. In particular, the IRS calculates inputted income as function of labor. Whenever an entrepreneur reports profits that are lower than inputted income, she is randomly monitored. Finally, we formalize a model of optimal presumption taxation, in which inputted income is the tax base, to compare revenue collection across tax systems.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Public Economics.
Volume (Year): 95 (2011)
Issue (Month): 9 ()
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Web page: http://www.elsevier.com/locate/inca/505578
Optimal auditing; Tax evasion; Informal sector; Missing middle; Entrepreneurship; Presumptive taxation;
Other versions of this item:
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion
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- Eduardo Zilberman, 2011. "Audits or Distortions: The Optimal Scheme to Enforce Self-Employment Income Taxes," Textos para discussÃ£o 590, Department of Economics PUC-Rio (Brazil).
- Alstadsæter, Annette & Jacob, Martin, 2013.
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- Annette Alstadsæter & Martin Jacob, 2013. "The Effect of Awareness and Incentives on Tax Evasion," CESifo Working Paper Series 4369, CESifo Group Munich.
- Julio Cesar Leal Ordonez, 2014.
"Tax collection, the informal sector, and productivity,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 17(2), pages 262-286, April.
- Julio Cesar Leal Ordonez, 2013. "Code and data files for "Tax collection, the informal sector, and productivity"," Computer Codes 11-242, Review of Economic Dynamics.
- Laszlo Goerke, 2014.
"Income Tax Buyouts and Income Tax Evasion,"
CESifo Working Paper Series
4613, CESifo Group Munich.
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