Income Tax Buyouts and Income Tax Evasion
AbstractA 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 InfoPaper provided by Institute of Labour Law and Industrial Relations in the European Union (IAAEU) in its series IAAEU Discussion Papers with number 201401.
Date of creation: Jan 2014
Date of revision:
Asymmetric information; Revenues; Self-selection; Tax buyouts; Tax evasion;
Other versions of this item:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
- H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
- H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion
This paper has been announced in the following NEP Reports:
- NEP-ACC-2014-02-08 (Accounting & Auditing)
- NEP-ALL-2014-02-08 (All new papers)
- NEP-CTA-2014-02-08 (Contract Theory & Applications)
- NEP-IUE-2014-02-08 (Informal & Underground Economics)
- NEP-PBE-2014-02-08 (Public Economics)
- NEP-PUB-2014-02-08 (Public Finance)
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