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Penalties in the Theory of Equilibrium Tax Evasion: Solving King John's Problem

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  • Bernhard Neumärker

    ()
    (Department of Economics and Behavioral Sciences, University of Freiburg, Freiburg, Germany)

  • Gerald Pech

    (School of Management and Economics, Johannes-Gutenberg University, Mainz, Germany)

Abstract

The authors characterize equilibria of an income reporting game with bounded returns and no commitment where detected tax evaders are charged the maximally feasible amount. Introducing partial commitment to punishment relief eliminates multiplicity of equilibria. The authors identify a unique limit equilibrium where the poorest citizens evade, intermediate citizens are honest, and the richest citizens are indifferent between evading and truth telling. For small tax rates and auditing cost, committing to a discretionary punishment relief scheme increases expected tax revenue.

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Bibliographic Info

Article provided by in its journal Public Finance Review.

Volume (Year): 39 (2011)
Issue (Month): 1 (January)
Pages: 5-24

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Handle: RePEc:sae:pubfin:v:39:y:2011:i:1:p:5-24

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Keywords: tax evasion; signaling; optimal punishment;

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  1. Sanjit Dhami & Ali al-Nowaihi, 2006. "Hang ’em with probability zero: Why does it not work?," Discussion Papers in Economics 06/14, Department of Economics, University of Leicester.
  2. Derek Pyne, 2004. "Can Making It Harder to Convict Criminals Ever Reduce Crime?," European Journal of Law and Economics, Springer, Springer, vol. 18(2), pages 191-201, September.
  3. Landsberger, Michael & Monderer, Dov & Talmor, Irit, 2000. " Feasible Net Income Distributions Under Income Tax Evasion: An Equilibrium Analysis," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 2(1), pages 135-53.
  4. repec:ebl:ecbull:v:8:y:2004:i:5:p:1-9 is not listed on IDEAS
  5. A. Mitchell Polinsky & Steven Shavell, 1999. "The Economic Theory of Public Enforcement of Law," NBER Working Papers 6993, National Bureau of Economic Research, Inc.
  6. Kolm, Serge-Christophe, 1973. "A note on optimum tax evasion," Journal of Public Economics, Elsevier, Elsevier, vol. 2(3), pages 265-270, July.
  7. Alm, James & McKee, Michael, 2004. "Tax compliance as a coordination game," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 54(3), pages 297-312, July.
  8. 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.
  9. Ingolf Dittmann, 2006. "The Optimal Use of Fines and Imprisonment If Governments Do Not Maximize Welfare," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 8(4), pages 677-695, October.
  10. Gary S. Becker, 1968. "Crime and Punishment: An Economic Approach," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 76, pages 169.
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Cited by:
  1. Oberlack, Christoph & Neumärker, Bernhard, 2011. "Economics, institutions and adaptation to climate change," The Constitutional Economics Network Working Papers 04-2011, University of Freiburg, Department of Economic Policy and Constitutional Economic Theory.
  2. Pickhardt, Michael & Prinz, Aloys, 2014. "Behavioral dynamics of tax evasion – A survey," Journal of Economic Psychology, Elsevier, Elsevier, vol. 40(C), pages 1-19.

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