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Cost Uncertainty and Taxpayer Compliance

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  • Jordi Caballé

    ()

  • Judith Panadés

    ()

Abstract

The existence of a private cost borne by audited taxpayers affects the tax enforcement policy. This is so because tax auditors will face now two sources of uncertainty, namely, the typical one associated with taxpayers’ income and that associated with the taxpayers’ idiosyncratic attitude towards tax compliance. Moreover, the inspection policy can be exposed to some randomness from the taxpayers’ viewpoint due to the uncertainty about the audit cost borne by the tax authority. In this paper we provide an unified framework to analyze the effects of all these sources of uncertainty in a model of tax compliance with strategic interaction between auditors and taxpayers. We show that more variance in the distribution of the taxpayers’ private cost of evading raises both tax compliance and the ex-ante welfare of taxpayers. The effects of the uncertainty about the audit cost faced by the tax authority are generally ambiguous. We also discuss the implications of our model for the regressive (or progressive) bias of the effective tax system. Copyright Springer Science + Business Media, Inc. 2005

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Bibliographic Info

Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 12 (2005)
Issue (Month): 3 (May)
Pages: 239-263

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Handle: RePEc:kap:itaxpf:v:12:y:2005:i:3:p:239-263

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Web page: http://www.springerlink.com/link.asp?id=102915

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Keywords: tax evasion; audit cost;

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References

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  16. Scotchmer, Suzanne, 1989. "Who profits from taxpayer confusion?," Economics Letters, Elsevier, vol. 29(1), pages 49-55.
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  18. Erard, Brian & Feinstein, Jonathan S, 1994. "The Role of Moral Sentiments and Audit Perceptions in Tax Compliance," Public Finance = Finances publiques, , vol. 49(Supplemen), pages 70-89.
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Cited by:
  1. Jordi Caballé & Judith Panadés, 2007. "Tax Rates, Tax Evasion, and Growth in a Multi-period Economy," Hacienda Pública Española, IEF, vol. 183(4), pages 67-80, december.

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