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On the Budget-Constrained IRS: Equilibrium and Equilibrium and efficiency

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    Abstract

    This paper extends Graetz, Reinganum and Wilde’s (1986) seminal work on tax compliance to the real-world scenario where the IRS (Internal Revenue Service) faces a budget constraint imposed upon her by the Congress. The paper consists of two parts. The first part is positive –we characterize the equilibria resulting from the interaction between taxpayers and the budget-constrained IRS. The second part is normative - we examine the effeciency implication of varying the size of the budget allocated to the IRS. It is shown that, to mitigate or eliminate the so-called “congestion e¤ect,” the IRS should be sufficiently budgeted and, in particular, we provide a case for the policy prescription that the size of the budget allocated to the IRS should be expanded as long as an additional dollar allocated could return more than an additional dollar of tax revenue.

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    File URL: http://www.econ.sinica.edu.tw/upload/file/07-a002.2008090209364018.pdf
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    Bibliographic Info

    Paper provided by Institute of Economics, Academia Sinica, Taipei, Taiwan in its series IEAS Working Paper : academic research with number 07-A002.

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    Length: 41 pages
    Date of creation: Jan 2007
    Date of revision:
    Handle: RePEc:sin:wpaper:07-a002

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    1. Sandmo, Agnar, 2005. "The Theory of Tax Evasion: A Retrospective View," National Tax Journal, National Tax Association, vol. 58(4), pages 643-63, December.
    2. Sanchez, Isabel & Sobel, Joel, 1993. "Hierarchical design and enforcement of income tax policies," Journal of Public Economics, Elsevier, vol. 50(3), pages 345-369, March.
    3. Erard, Brian & Ho, Chih-Chin, 2001. "Searching for ghosts: who are the nonfilers and how much tax do they owe?," Journal of Public Economics, Elsevier, vol. 81(1), pages 25-50, July.
    4. Louis Kaplow, 1991. "Optimal Taxation with Costly Enforcement and Evasion," NBER Working Papers 2996, National Bureau of Economic Research, Inc.
    5. Dan Usher, 1986. "Tax Evasion and the Marginal Cost of Public Funds," Working Papers 637, Queen's University, Department of Economics.
    6. James Andreoni & Brian Erard & Jonathan Feinstein, 1998. "Tax Compliance," Journal of Economic Literature, American Economic Association, vol. 36(2), pages 818-860, June.
    7. Joel Slemrod & Shlomo Yitzhaki, 2000. "Tax Avoidance, Evasion, and Administration," NBER Working Papers 7473, National Bureau of Economic Research, Inc.
    8. Ehud Kalai, 2004. "Large Robust Games," Econometrica, Econometric Society, vol. 72(6), pages 1631-1665, November.
    9. 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.
    10. Gul, Faruk & Sonnenschein, Hugo & Wilson, Robert, 1986. "Foundations of dynamic monopoly and the coase conjecture," Journal of Economic Theory, Elsevier, vol. 39(1), pages 155-190, June.
    11. Joel Slemrod & Jon Bakija, 2008. "Taxing Ourselves, 4th Edition: A Citizen's Guide to the Debate over Taxes," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262693631, December.
    12. Louis Kaplow, 1996. "How Tax Complexity and Enforcement Affect the Equity and Efficiency of The Income Tax," NBER Working Papers 5391, National Bureau of Economic Research, Inc.
    13. Toma, Eugenia Froedge & Toma, Mark, 1992. "Tax Collection with Agency Costs: Private Contracting or Government Bureaucrats?," Economica, London School of Economics and Political Science, vol. 59(233), pages 107-20, February.
    14. Slemrod, Joel & Yitzhaki, Shlomo, 1987. " The Optimal Size of a Tax Collection Agency," Scandinavian Journal of Economics, Wiley Blackwell, vol. 89(2), pages 183-92.
    15. Reinganum, Jennifer F & Wilde, Louis L, 1986. "Equilibrium Verification and Reporting Policies in a Model of Tax Compliance," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(3), pages 739-60, October.
    16. Glen Ueng, K. L. & Yang, C. C., 2001. "Plea bargaining with the IRS: extensions and further results," Journal of Public Economics, Elsevier, vol. 81(1), pages 83-98, July.
    17. Glen Ueng, K. L. & Yang, C. C., 2000. "Taxation with little administration," Journal of Public Economics, Elsevier, vol. 75(1), pages 145-156, January.
    18. Macho-Stadler, Ines & Perez-Castrillo, J David, 1997. "Optimal Auditing with Heterogeneous Income," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(4), pages 951-68, November.
    19. Mayshar, Joram, 1991. " Taxation with Costly Administration," Scandinavian Journal of Economics, Wiley Blackwell, vol. 93(1), pages 75-88.
    20. Cowell, F A, 1990. "Tax Sheltering and the Cost of Evasion," Oxford Economic Papers, Oxford University Press, vol. 42(1), pages 231-43, January.
    21. Reinganum, Jennifer F & Wilde, Louis L, 1988. "A Note on Enforcement Uncertainty and Taxpayer Compliance," The Quarterly Journal of Economics, MIT Press, vol. 103(4), pages 793-98, November.
    22. Reinganum, Jennifer F. & Wilde, Louis L., 1985. "Income tax compliance in a principal-agent framework," Journal of Public Economics, Elsevier, vol. 26(1), pages 1-18, February.
    23. Kaplow, Louis, 1996. "How Tax Complexity and Enforcement Affect the Equity and Efficiency of the Income Tax," National Tax Journal, National Tax Association, vol. 49(1), pages 135-50, March.
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