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Auditing with Signals

Author

Listed:
  • Ines Macho-Stadler

    (Universitat Autonoma de Barcelona)

  • David Perez-Castrillo

    (Unviersitat Autonoma de Barcelona)

Abstract

This paper is a first step in the analysis of the use of signals of taxpayer's incomes by tax audit authorities. In a very simple model, we consider the design of the audit strategy when the tax authority can commit to it and has free access to a signal correlated with the taxpayer's true income. We discuss the optimal enforcement policy and compare it with the optimal one when only self-reported income is considered. Our main result is that the well-known regressive bias of revenue-maximizing audit rules may be convert in a progressive one when signals are used.

Suggested Citation

  • Ines Macho-Stadler & David Perez-Castrillo, 2000. "Auditing with Signals," Econometric Society World Congress 2000 Contributed Papers 0660, Econometric Society.
    • Handle: RePEc:ecm:wc2000:0660
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    References listed on IDEAS

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    1. Sanchez, Isabel & Sobel, Joel, 1993. "Hierarchical design and enforcement of income tax policies," Journal of Public Economics, Elsevier, vol. 50(3), pages 345-369, March.
    2. Cremer, H. & Marchand, M. & Pestieau, P., 1990. "Evading, auditing and taxing : The equity-compliance tradeoff," Journal of Public Economics, Elsevier, vol. 43(1), pages 67-92, October.
    3. Eduardo Engel & James R. Hines Jr., 1998. "Understanding Tax Evasion Dynamics," Documentos de Trabajo 47, Centro de Economía Aplicada, Universidad de Chile.
    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. James Andreoni & Brian Erard & Jonathan Feinstein, 1998. "Tax Compliance," Journal of Economic Literature, American Economic Association, vol. 36(2), pages 818-860, June.
    6. Alm, James & Bahl, Roy & Murray, Matthew N., 1993. "Audit selection and income tax underreporting in the tax compliance game," Journal of Development Economics, Elsevier, vol. 42(1), pages 1-33, October.
    7. Parkash Chander & Louis L. Wilde, 1998. "A General Characterization of Optimal Income Tax Enforcement," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 65(1), pages 165-183.
    8. Jorge Martinez-Vazquez & Mark Rider, 2003. "Multiple Modes of Tax Evasion: Theory and Evidence from the TCMP," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0306, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
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    Cited by:

    1. Macho-Stadler, Ines & Perez-Castrillo, David, 2006. "Optimal enforcement policy and firms' emissions and compliance with environmental taxes," Journal of Environmental Economics and Management, Elsevier, vol. 51(1), pages 110-131, January.
    2. Jörg Schiller, 2006. "The Impact of Insurance Fraud Detection Systems," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 73(3), pages 421-438, September.
    3. Eduardo Zilberman, 2016. "Audits or Distortions: The Optimal Scheme to Enforce Self-Employment Income Taxes," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 18(4), pages 511-544, August.
    4. Inés Macho Stadler & David Perez-Castrillo, 2005. "Optimal inspection policy and income-tax compliance," Hacienda Pública Española / Review of Public Economics, IEF, vol. 173(2), pages 9-45, June.

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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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