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The Optimality of Punishing Only the Innocent: The Case of Tax Evasion

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  • Robin Boadway
  • Motohiro Sato

Abstract

We study the effectson tax enforcement and tax policy of unintentional complianceerrors by taxpayers and administrative errors by tax auditors.The government can impose both penalties for misreporting andrewards for honest reporting. Maximal sanctions will not be appliedbecause errors are possible, so evasion cannot be eliminatedcostlessly. Under optimal policy intentional evasion can be deterred,but innocent tax evaders must be penalized whether they haveunintentionally evaded or have been mistakenly convicted. Thisdeters intentional evasion, but limits redistribution. Withoutrewards for honest reporting, the revelation principle need notapply, so intentional evasion can occur. Copyright Kluwer Academic Publishers 2000

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Bibliographic Info

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

Volume (Year): 7 (2000)
Issue (Month): 6 (December)
Pages: 641-664

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Handle: RePEc:kap:itaxpf:v:7:y:2000:i:6:p:641-664

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

Related research

Keywords: tax evasion; compliance errors; administrative errors;

References

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  1. Cremer, Helmuth & Gahvari, Firouz, 1996. "Tax evasion and the optimum general income tax," Journal of Public Economics, Elsevier, vol. 60(2), pages 235-249, May.
  2. Gary S. Becker, 1974. "Crime and Punishment: An Economic Approach," NBER Chapters, in: Essays in the Economics of Crime and Punishment, pages 1-54 National Bureau of Economic Research, Inc.
  3. Bordignon, Massimo, 1993. "A fairness approach to income tax evasion," Journal of Public Economics, Elsevier, vol. 52(3), pages 345-362, October.
  4. Frank A. Cowell, 1990. "Cheating the Government: The Economics of Evasion," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262532484, December.
  5. Reinganum, Jennifer F. & Wilde, Louis L., 1985. "Income tax compliance in a principal-agent framework," Journal of Public Economics, Elsevier, vol. 26(1), pages 1-18, February.
  6. Stern, Nicholas, 1982. "Optimum taxation with errors in administration," Journal of Public Economics, Elsevier, vol. 17(2), pages 181-211, March.
  7. Boadway, Robin & Marceau, Nicolas & Marchand, Maurice, 1996. "Time-Consistent Criminal Sanctions," Public Finance = Finances publiques, , vol. 51(2), pages 149-65.
  8. 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.
  9. Robin Boadway & Michael Keen, 1993. "Evasion and time consistency in the taxation of capital income," IFS Working Papers W93/20, Institute for Fiscal Studies.
  10. Kaplow, Louis & Shavell, Steven, 1994. "Accuracy in the Determination of Liability," Journal of Law and Economics, University of Chicago Press, vol. 37(1), pages 1-15, April.
  11. Gordon, James P. P., 1989. "Individual morality and reputation costs as deterrents to tax evasion," European Economic Review, Elsevier, vol. 33(4), pages 797-805, April.
  12. Marhuenda, Francisco & Ortuno-Ortin, Ignacio, 1997. " Tax Enforcement Problems," Scandinavian Journal of Economics, Wiley Blackwell, vol. 99(1), pages 61-72, March.
  13. Chander, Parkash & Wilde, Louis L, 1998. "A General Characterization of Optimal Income Tax Enforcement," Review of Economic Studies, Wiley Blackwell, vol. 65(1), pages 165-83, January.
  14. Garoupa, Nuno, 1997. " The Theory of Optimal Law Enforcement," Journal of Economic Surveys, Wiley Blackwell, vol. 11(3), pages 267-95, September.
  15. Dan Usher, 1986. "Tax Evasion and the Marginal Cost of Public Funds," Working Papers 637, Queen's University, Department of Economics.
  16. Cremer, Helmuth & Gahvari, Firouz, 1993. "Tax evasion and optimal commodity taxation," Journal of Public Economics, Elsevier, vol. 50(2), pages 261-275, February.
  17. Polinsky, Mitchell & Shavell, Steven, 1979. "The Optimal Tradeoff between the Probability and Magnitude of Fines," American Economic Review, American Economic Association, vol. 69(5), pages 880-91, December.
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Citations

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Cited by:
  1. Agnar Sandmo, 2012. "An evasive topic: theorizing about the hidden economy," International Tax and Public Finance, Springer, vol. 19(1), pages 5-24, February.
  2. Ralph-C Bayer, 2004. "Finding Out Who the Crooks Are - Tax Evasion with Sequential Auditing," School of Economics Working Papers 2004-10, University of Adelaide, School of Economics.
  3. Wolfram F. Richter, 2007. "Geplante Steuerhinterziehung und ihre effiziente Bestrafung," RWI Materialien, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, pages 31, 08.
  4. Laszlo Goerke, 2008. "Tax Overpayments, Tax Evasion, and Book-Tax Differences," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 10(4), pages 643-671, 08.
  5. Wolfram F. Richter & Robin W. Boadway, 2005. "Trading Off Tax Distortion and Tax Evasion," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 7(3), pages 361-381, 08.
  6. Stefan Dodds, 2002. "Privacy and Endogenous Monitoring Choice When Private Information is a Public Good," Working Papers 1010, Queen's University, Department of Economics.
  7. Silvia Platoni & Francesco Timpano, 2013. "Redistribution and Tax Evasion: an Asymmetric Information Approach," DISCE - Quaderni del Dipartimento di Scienze Economiche e Sociali dises1394, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
  8. Konrad, Kai A. & Qari, Salmai, 2009. "The last refuge of a scoundrel? Patriotism and tax compliance," Discussion Papers, Research Unit: Market Processes and Governance SP II 2009-04, Social Science Research Center Berlin (WZB).
  9. Pickhardt, Michael & Prinz, Aloys, 2014. "Behavioral dynamics of tax evasion – A survey," Journal of Economic Psychology, Elsevier, vol. 40(C), pages 1-19.
  10. Cécile Bazart & Michael Pickhardt, 2009. "Fighting Income Tax Evasion with Positive Rewards: Experimental Evidence," Working Papers 09-01, LAMETA, Universtiy of Montpellier, revised Jun 2009.
  11. Jordi Caballé & Judith Panadés, 2005. "Cost Uncertainty and Taxpayer Compliance," International Tax and Public Finance, Springer, vol. 12(3), pages 239-263, May.
  12. Frank Cowell, 2003. "Sticks and carrots," LSE Research Online Documents on Economics 2046, London School of Economics and Political Science, LSE Library.
  13. Philip Curry & Steeve Mongrain, . "What You Don't See Can't Hurt You: An Economic Analysis of," American Law & Economics Association Annual Meetings 1062, American Law & Economics Association.
  14. Hashimzade, Nigar & Huang, Zhanyi & Myles, Gareth D., 2010. "Tax fraud by firms and optimal auditing," International Review of Law and Economics, Elsevier, vol. 30(1), pages 10-17, March.

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