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Income Tax Buyouts and Income Tax Evasion

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  • Laszlo Goerke

    ()
    (Institute for Labour Law and Industrial Relations in the EU, University of Trier)

Abstract

A tax buyout is a contract between tax authorities and a tax payer which reduces the marginal income tax rate in exchange for a lump-sum payment. While previous contributions have focussed on labour supply, we consider the interaction with tax evasion and show that a buyout can increase expected tax revenues. This will be the case if (1) the audit probability is constant and the penalty for evasion is a function of undeclared income or (2) the penalty depends on the amount of taxes evaded, and authorities use information about income generated by the decision about a tax buyout offer when setting audit probabilities. Since individuals will only utilise a tax buyout if they are better off, higher tax revenues imply that such contracts can be Pareto-improving.

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Bibliographic Info

Paper provided by Institute of Labour Law and Industrial Relations in the European Union (IAAEU) in its series IAAEU Discussion Papers with number 201401.

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Date of creation: Jan 2014
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Handle: RePEc:iaa:dpaper:201401

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Keywords: Asymmetric information; Revenues; Self-selection; Tax buyouts; Tax evasion;

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  1. Laszlo Goerke, 2003. "Tax Evasion and Tax Progressivity," Public Finance Review, , vol. 31(2), pages 189-203, March.
  2. Chu, C. Y. Cyrus, 1990. "Plea bargaining with the irs," Journal of Public Economics, Elsevier, vol. 41(3), pages 319-333, April.
  3. Tonin, Mirco, 2010. "Too low to be true: the use of minimum thresholds to fight tax evasion," Discussion Paper Series In Economics And Econometrics 1018, Economics Division, School of Social Sciences, University of Southampton.
  4. Josef Falkinger & Herbert Walther, 1991. "Separating small and big fish: The case of income tax evasion," Journal of Economics, Springer, vol. 54(1), pages 55-67, February.
  5. Alberto Alesina & Philippe Weil, 1992. "Menus of Linear Income Tax Schedules," NBER Working Papers 3968, National Bureau of Economic Research, Inc.
  6. Bigio, Saki & Zilberman, Eduardo, 2011. "Optimal self-employment income tax enforcement," Journal of Public Economics, Elsevier, vol. 95(9-10), pages 1021-1035, October.
  7. Pencavel, John H., 1979. "A note on income tax evasion, labor supply, and nonlinear tax schedules," Journal of Public Economics, Elsevier, vol. 12(1), pages 115-124, August.
  8. 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.
  9. Keen, Michael & Mintz, Jack, 2004. "The optimal threshold for a value-added tax," Journal of Public Economics, Elsevier, vol. 88(3-4), pages 559-576, March.
  10. Koskela, Erkki, 1983. "On the Shape of Tax Schedule, the Probability of Detection, and the Penalty Schemes as Deterrents to Tax Evasion," Public Finance = Finances publiques, , vol. 38(1), pages 70-80.
  11. Glen Ueng, K. L. & Yang, C. C., 2001. "Plea bargaining with the IRS: extensions and further results," Journal of Public Economics, Elsevier, vol. 81(1), pages 83-98, July.
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