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Finding out Who the Crooks Are – Tax Evasion with Sequential Auditing

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  • Ralph-C Bayer

    ()
    (School of Economics, University of Adelaide)

Abstract

This paper investigates multi-item moral hazard with auditing contests. Although the presented model is widely applicable, we choose tax evasion as an exemplary application. We introduce a tax-evasion model where tax authority and taxpayer invest in detection and concealment. The taxpayers have multiple potential income sources and are heterogeneous with respect to their evasion scruples. The tax authority - unable to commit to an audit strategy - observes a tax declaration and chooses its auditing efforts. We show that a tax inspector prefers to audit source by source until he finds evidence for evasion to conduct a full-scale audit thereafter.

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File URL: http://www.economics.adelaide.edu.au/research/papers/doc/wp2003-07.pdf
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Bibliographic Info

Paper provided by University of Adelaide, School of Economics in its series School of Economics Working Papers with number 2003-07.

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Length: 32 pages
Date of creation: 2003
Date of revision:
Handle: RePEc:adl:wpaper:2003-07

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Postal: Adelaide SA 5005
Phone: (618) 8303 5540
Web page: http://www.economics.adelaide.edu.au/
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Keywords: tax evasion; auditing rules; contest; moral hazard;

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  1. Cremer, Helmuth & Gahvari, Firouz, 1996. "Tax evasion and the optimum general income tax," Journal of Public Economics, Elsevier, Elsevier, vol. 60(2), pages 235-249, May.
  2. Mookherjee, Dilip & Png, Ivan, 1989. "Optimal Auditing, Insurance, and Redistribution," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 104(2), pages 399-415, May.
  3. Slemrod, Joel & Blumenthal, Marsha & Christian, Charles, 2001. "Taxpayer response to an increased probability of audit: evidence from a controlled experiment in Minnesota," Journal of Public Economics, Elsevier, Elsevier, vol. 79(3), pages 455-483, March.
  4. Robin Boadway & Motohiro Sato, 2000. "The Optimality of Punishing Only the Innocent: The Case of Tax Evasion," International Tax and Public Finance, Springer, Springer, vol. 7(6), pages 641-664, December.
  5. Paul Milgrom & John Roberts, 1980. "Predation, Reputation, and Entry Deterrence," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 427, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. 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, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(3), pages 739-60, October.
  7. Kreps, David M. & Milgrom, Paul & Roberts, John & Wilson, Robert, 1982. "Rational cooperation in the finitely repeated prisoners' dilemma," Journal of Economic Theory, Elsevier, Elsevier, vol. 27(2), pages 245-252, August.
  8. Graetz, Michael J. & Reinganum, Jennifer F. & Wilde, Louis L., . "The Tax Compliance Game: Toward an Interactive Theory of Law Enforcement," Working Papers, California Institute of Technology, Division of the Humanities and Social Sciences 589, California Institute of Technology, Division of the Humanities and Social Sciences.
  9. Mookherjee, Dilip & Png, I P L, 1990. "Enforcement Costs and the Optimal Progressivity of Income Taxes," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 6(2), pages 410-31, Fall.
  10. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, Elsevier, vol. 1(3-4), pages 323-338, November.
  11. Spicer, M W & Lundstedt, S B, 1976. "Understanding Tax Evasion," Public Finance = Finances publiques, , , vol. 31(2), pages 295-305.
  12. Cowell, F A, 1990. "Tax Sheltering and the Cost of Evasion," Oxford Economic Papers, Oxford University Press, vol. 42(1), pages 231-43, January.
  13. Macho-Stadler, Ines & Perez-Castrillo, J David, 1997. "Optimal Auditing with Heterogeneous Income," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(4), pages 951-68, November.
  14. Reinganum, Jennifer F. & Wilde, Louis L., 1985. "Income tax compliance in a principal-agent framework," Journal of Public Economics, Elsevier, Elsevier, vol. 26(1), pages 1-18, February.
  15. Chander, Parkash & Wilde, Louis L, 1998. "A General Characterization of Optimal Income Tax Enforcement," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 65(1), pages 165-83, January.
  16. Ajzen, Icek, 1991. "The theory of planned behavior," Organizational Behavior and Human Decision Processes, Elsevier, Elsevier, vol. 50(2), pages 179-211, December.
  17. Gideon Yaniv, 1999. "Tax Evasion, Risky Laundering, and Optimal Deterrence Policy," International Tax and Public Finance, Springer, Springer, vol. 6(1), pages 27-38, February.
  18. Border, Kim C & Sobel, Joel, 1987. "Samurai Accountant: A Theory of Auditing and Plunder," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 54(4), pages 525-40, October.
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