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Corporate Tax Evasion with Agency Costs

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Author Info
Keith J. Crocker
Joel Slemrod

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Abstract

This paper examines corporate tax evasion in the context of the contractual relationship between the shareholders of a firm and a tax manager who possesses private information regarding the extent of legally permissible reductions in taxable income, and who may also undertake illegal tax evasion. Using a costly state falsification framework, we characterize formally the optimal incentive compensation contract for the tax manager and, in particular, how the form of that contract changes in response to alternative enforcement policies imposed by the taxing authority. The optimal contract may adjust to offset, at least partially, the effect of sanctions against illegal evasion, and we find a new and policy-relevant non-equivalence result: penalties imposed on the tax manager are more effective in reducing evasion than are those imposed on shareholders.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10690.

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Date of creation: Aug 2004
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Handle: RePEc:nbr:nberwo:10690

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Find related papers by JEL classification:
H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Lacker, J.M., 1989. "Optimal Contracts Under Costly State Falsification," Purdue University Economics Working Papers 956, Purdue University, Department of Economics.
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  2. Kong-Pin Chen & C.Y. Cyrus Chu, 2005. "Internal Control vs. External Manipulation: A Model of Corporate Income Tax Evasion," RAND Journal of Economics, The RAND Corporation, vol. 36(4), pages 151-164, Winter.
  3. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August. [Downloadable!] (restricted)
  4. Keith J. Crocker & John Morgan, 1998. "Is Honesty the Best Policy? Curtailing Insurance Fraud through Optimal Incentive Contracts," Journal of Political Economy, University of Chicago Press, vol. 106(2), pages 355-375, April. [Downloadable!] (restricted)
  5. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 323-338, November. [Downloadable!] (restricted)
  6. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring. [Downloadable!] (restricted)
  7. Polinsky, A. Mitchell & Shavell, Steven, 1993. "Should employees be subject to fines and imprisonment given the existence of corporate liability?," International Review of Law and Economics, Elsevier, vol. 13(3), pages 239-257, September. [Downloadable!] (restricted)
  8. Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  9. Myerson, Roger B, 1979. "Incentive Compatibility and the Bargaining Problem," Econometrica, Econometric Society, vol. 47(1), pages 61-73, January. [Downloadable!] (restricted)
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  10. Frank A Cowell, 2003. "Sticks and Carrots," STICERD - Distributional Analysis Research Programme Papers 68, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Keith J. Crocker & Joel Slemrod, 2006. "The Economics of Earnings Manipulation and Managerial Compensation," NBER Working Papers 12645, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Laszlo Goerke, 2008. "Tax Overpayments, Tax Evasion, and Book-Tax Differences," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  3. Laszlo Goerke, 2007. "Corporate and personal income tax declarations," International Tax and Public Finance, Springer, vol. 14(3), pages 281-292, June. [Downloadable!] (restricted)
    Other versions:
  4. Mihir A. Desai & Dhammika Dharmapala, 2005. "Corporate Tax Avoidance and Firm Value," NBER Working Papers 11241, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Douglas A. Shackelford & Joel Slemrod & James M. Sallee, 2007. "A Unifying Model of How the Tax System and Generally Accepted Accounting Principles Affect Corporate Behavior," NBER Working Papers 12873, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Tedds, Lindsay, 2007. "Keeping it off the Books: An Empirical Investigation of Firms that Engage in Tax Evasion," MPRA Paper 4213, University Library of Munich, Germany. [Downloadable!]
  7. Henrik Jacobsen Kleven & Claus Thustrup Kreiner & Emmanuel Saez, 2009. "Why Can Modern Governments Tax So Much? An Agency Model of Firms as Fiscal Intermediaries," NBER Working Papers 15218, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Lipatov, Vilen, 2005. "Corporate Tax Evasion: the Case for Specialists," MPRA Paper 14181, University Library of Munich, Germany, revised Mar 2009. [Downloadable!]
  9. Kuhn, Michael & Siciliani, Luigi, 2007. "Performance Indicators for Quality with Adverse Selection, Gaming and Inequality Aversion," CEPR Discussion Papers 6261, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  10. Alan J. Auerbach, 2005. "Who Bears the Corporate Tax? A review of What We Know," NBER Working Papers 11686, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Simon Loretz & Padraig J. Moore, 2009. "Corporate Tax Competition between Firms," Working Papers 0912, Oxford University Centre for Business Taxation. [Downloadable!]
    Other versions:
  12. Lindsay M. Tedds, 2005. "Keeping It Off The Books: An Empirical Investigation Into the Characteristics of Firms That Engage In Tax Non-Compliance," Department of Economics Working Papers 2005-01, McMaster University. [Downloadable!]
  13. Levin, Jörgen & Widell, Lars, 2007. "Tax Evasion in Kenya and Tanzania:Evidence from Missing Imports," Working Papers 2007:8, Örebro University, Swedish Business School. [Downloadable!]
  14. Joel Slemrod, 2004. "The Economics of Corporate Tax Selfishness," NBER Working Papers 10858, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  15. Lipatov, Vilen, 2006. "Tax Evasion and Coordination," MPRA Paper 1251, University Library of Munich, Germany, revised Dec 2006. [Downloadable!]
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