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Audits or Distortions: The Optimal Scheme to Enforce Self-Employment Income Taxes

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  • Eduardo Zilberman

    ()
    (Department of Economics PUC-Rio)

Abstract

I 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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Bibliographic Info

Paper provided by Department of Economics PUC-Rio (Brazil) in its series Textos para discussão with number 590.

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Length: 59p
Date of creation: Jul 2011
Date of revision:
Handle: RePEc:rio:texdis:590

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