Optimal tax enforcement under prospect theory
AbstractProspect Theory (PT) has become the most credited alternative to Expected Utility Theory (EUT) as a theory of decision under uncertainty. This paper characterises the optimal income tax and audit schemes under tax evasion, when taxpayers behave as predicted by PT. We show that the standard EUT results keep holding under PT, under even weaker conditions. Under fair assumptions on the reference income and on the utility function of taxpayers, we show that the optimal audit probability function is non-increasing and the optimal tax function is nondecreasing and concave.
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Bibliographic InfoPaper provided by Institut d'Economia de Barcelona (IEB) in its series Working Papers with number 2011/29.
Length: 19 pages
Date of creation: 2011
Date of revision:
tax evasion; income tax enforcement; prospect theory;
Other versions of this item:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion
- K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
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