Audits or Distortions: The Optimal Scheme to Enforce Self-Employment Income Taxes
AbstractI investigate the optimal auditing scheme for a revenue-maximizing tax-collection agency that observes not only reported pro ts, but also the level of employment at each firm. Each firm is owned by a single entrepreneur whose managerial ability is random. The optimal auditing scheme is discontinuous and non-monotone in ability. In intermediate audit costs, less-productive entrepreneurs face auditing probabilities that increase in ability, whereas the ablest ones are not audited. I argue that if the optimal auditing scheme were adopted in practice, net revenue collected from nonfarm sole proprietors would increase by at least 59 percent.
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This paper has been announced in the following NEP Reports:
- NEP-ACC-2011-07-21 (Accounting & Auditing)
- NEP-ALL-2011-07-21 (All new papers)
- NEP-ENT-2011-07-21 (Entrepreneurship)
- NEP-IUE-2011-07-21 (Informal & Underground Economics)
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