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The cutoff policy of taxation when CRRA taxpayers differ in risk aversion coefficients and income: a proof

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Author Info
Privileggi, Fabio ()

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Abstract

Under a cutoff policy, taxpayers can either report income as usual and run the risk of being audited, or report a "cutoff" income and hence pay a threshold tax that guarantees not being audited. Whereas the mainstream literature in this field assumes risk neutrality of taxpayers – with some notable exceptions like Chu (1990) and Glen Ueng and Yang (2001) – this paper assumes risk aversion instead: taxpayers have a Constant Relative Risk Aversion (CRRA) utility function and differ in terms of their relative risk aversion coefficient and income. The novel contribution of this work is that, under certain conditions, the cutoff is accepted by taxpayers with intermediate characteristics in terms of income and relative risk aversion. Contrary to the standard result in the literature, a full separation of types (the rich who accept the cutoff versus the poor who refuse it) does not arise. However, our results confirm that the cutoff policy violates equity, as only some taxpayers directly benefit. Nonetheless, the perception of this drawback may in practice be obfuscated because that exclusion does not necessarily affect only the poor.

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Paper provided by Department of Public Policy and Public Choice - POLIS in its series P.O.L.I.S. department's Working Papers with number 99.

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Length: 30 pages
Date of creation: Dec 2007
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Handle: RePEc:uca:ucapdv:99

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Related research
Keywords: cutoff; tax evasion; relative risk aversion.;

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Find related papers by JEL classification:
H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion
D89 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Other
K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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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. Stefania Ottone & Ferrucio Ponzano & Roberto Ricciuti, 2009. "Simulating Voting Rule Reforms for the Italian Parliament: An Economic Perspective," AUCO Czech Economic Review, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 3(3), pages 292-304, October. [Downloadable!]
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  2. Ortona, Guido & Ottone, Stefania & Ponzano, Ferruccio & Scacciati, Francesco, 2006. "Labour supply in presence of taxation financing public services. An experimental approach," P.O.L.I.S. department's Working Papers 71, Department of Public Policy and Public Choice - POLIS. [Downloadable!]
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  3. 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. [Downloadable!] (restricted)
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  4. Ottone, Stefania, 2007. "Are people samaritans or avengers?," P.O.L.I.S. department's Working Papers 77, Department of Public Policy and Public Choice - POLIS. [Downloadable!]
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  5. Roberto Ricchiuti, 2006. "Un'Analisi Economica della Partecipazione ai Referendum Abrogativi," ICER Working Papers 24-2006, ICER - International Centre for Economic Research. [Downloadable!]
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  6. Ottone, Stefania & Ponzano, Ferruccio, 2007. "Non-self-centered inequity aversion matters. A model," P.O.L.I.S. department's Working Papers 91, Department of Public Policy and Public Choice - POLIS. [Downloadable!]
  7. Montefiori, Marcello & Resta, Marina, 2008. "Social influence and neighbourhood effects in the health care market," P.O.L.I.S. department's Working Papers 98, Department of Public Policy and Public Choice - POLIS. [Downloadable!]
  8. 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)
  9. Privileggi, Fabio, 2007. "The cutoff policy of taxation when CRRA taxpayers differ in risk aversion coefficients and income: a proof," P.O.L.I.S. department's Working Papers 99, Department of Public Policy and Public Choice - POLIS. [Downloadable!]
  10. 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. [Downloadable!] (restricted)
  11. 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. [Downloadable!] (restricted)
  12. Chander, Parkash & Wilde, Louis L, 1998. "A General Characterization of Optimal Income Tax Enforcement," Review of Economic Studies, Blackwell Publishing, vol. 65(1), pages 165-83, January. [Downloadable!] (restricted)
  13. Ricciuti, Roberto, 2007. "The quest for a fiscal rule: Italy, 1861-1998," P.O.L.I.S. department's Working Papers 86, Department of Public Policy and Public Choice - POLIS. [Downloadable!]
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  14. Mookherjee, Dilip & Png, Ivan, 1989. "Optimal Auditing, Insurance, and Redistribution," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 399-415, May. [Downloadable!] (restricted)
  15. Scotchmer, Suzanne, 1987. "Audit Classes and Tax Enforcement Policy," American Economic Review, American Economic Association, vol. 77(2), pages 229-33, May. [Downloadable!] (restricted)
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  1. Marchese, Carla, 2008. "The limits to growth then and now," P.O.L.I.S. department's Working Papers 105, Department of Public Policy and Public Choice - POLIS. [Downloadable!]
  2. Ottone, Stefania & Ponzano, Ferruccio, 2008. "How People perceive the Welfare State. A real effort experiment," P.O.L.I.S. department's Working Papers 101, Department of Public Policy and Public Choice - POLIS. [Downloadable!]
  3. Privileggi, Fabio, 2007. "The cutoff policy of taxation when CRRA taxpayers differ in risk aversion coefficients and income: a proof," P.O.L.I.S. department's Working Papers 99, Department of Public Policy and Public Choice - POLIS. [Downloadable!]
  4. Cavaleri, Pietro & Keren, Michael & Ramello, Giovanni B. & Valli, Vittorio, 2009. "Publishing an E-journal on a shoe string: Is it a sustainaible project?," P.O.L.I.S. department's Working Papers 118, Department of Public Policy and Public Choice - POLIS. [Downloadable!]
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  5. Acemoglu, Daron & Ticchi, Davide & Vindigni, Andrea, 2008. "A theory of military dictatorships," P.O.L.I.S. department's Working Papers 100, Department of Public Policy and Public Choice - POLIS. [Downloadable!]
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