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Tax Compliance by Firms and Audit Policy

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  • Ralph Bayer
  • Frank A Cowell

Abstract

Firms are usually better informed than tax authorities about market conditions and the potential profits of competitors. They may try to exploit this situation by underreporting their own taxable profits. The tax authority could offset firms' informational advantage by adopting "smarter" audit policies .that take into account the relationship between a firm's reported profits and reports for the industry as a whole. Such an audit policy will create an externality for the decision makers in the industry and this externality can be expected to affect not only firms' reporting policies but also their market decisions. If public policy takes into account wider economic issues than just revenue raising what is the appropriate way for a tax authority to run such an audit policy? We develop some clear policy rules in a standard model of an industry and show the effect of these rules using simulations.ca3

Suggested Citation

  • Ralph Bayer & Frank A Cowell, 2010. "Tax Compliance by Firms and Audit Policy," STICERD - Distributional Analysis Research Programme Papers 102, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    • Handle: RePEc:cep:stidar:102
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    References listed on IDEAS

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    1. Frank A. Cowell, 1990. "Cheating the Government: The Economics of Evasion," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262532484, December.
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    6. Bayer, Ralph & Cowell, Frank, 2009. "Tax compliance and firms' strategic interdependence," Journal of Public Economics, Elsevier, vol. 93(11-12), pages 1131-1143, December.
    7. Kolm, Serge-Christophe, 1973. "A note on optimum tax evasion," Journal of Public Economics, Elsevier, vol. 2(3), pages 265-270, July.
    8. Martin Besfamille & Philippe De Donder & Jean Marie Lozachmeur, 2009. "Tax enforcement may decrease government revenue," Economics Bulletin, AccessEcon, vol. 29(4), pages 2665-2672.
    9. Lee, Kangoh, 1998. "Tax Evasion, Monopoly, and Nonneutral Profit Taxes," National Tax Journal, National Tax Association, vol. 51(n. 2), pages 333-38, June.
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    Cited by:

    1. Ralph‐C. Bayer, 2022. "The double dividend of relative auditing—Theory and experiments on corporate tax enforcement," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 24(6), pages 1433-1462, December.
    2. Ralph-C. Bayer, 2017. "The Double Dividend of Relative Auditing – Theory and Experiments on Corporate Tax Enforcement," School of Economics and Public Policy Working Papers 2017-14, University of Adelaide, School of Economics and Public Policy.
    3. Laszlo Goerke, 2021. "Tax Evasion by Firms," IAAEU Discussion Papers 202104, Institute of Labour Law and Industrial Relations in the European Union (IAAEU).
    4. Luciano Fanti & Domenico Buccella, 2022. "Indirect Taxation, Tax Evasion and Profts," Hacienda Pública Española / Review of Public Economics, IEF, vol. 242(3), pages 91-109, September.

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    More about this item

    Keywords

    Tax compliance; evasion; oligopoly;
    All these keywords.

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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