Optimal taxes and penalties when the government cannot commit to its audit policy
AbstractWe examine the problem of a utilitarian government that sets taxes and fines for evaders but cannot commit to any enforcement policy. Given the tax law, the government and taxpayers —some of whom are honest— play a report-audit game that, depending on taxes, fines and audit costs, generates either full evasion and no audits, or partial evasion and random auditing. Anticipating both possibilities, we characterize the optimal tax law. We show that it may be optimal for the government not to fine evaders as a way to commit not to audit. Moreover, social welfare is nonmonotonic in the audit cost.
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Bibliographic InfoPaper provided by Universidad Torcuato Di Tella in its series Department of Economics Working Papers with number 2010-10.
Length: 34 pages
Date of creation: Oct 2010
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Web page: http://www.utdt.edu/ver_contenido.php?id_contenido=439&id_item_menu=568
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Tax rates; Tax evasion; Enforcement; Audit costs; No commitment; Mixed-strategy equilibrium.;
Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion
This paper has been announced in the following NEP Reports:
- NEP-ACC-2010-11-06 (Accounting & Auditing)
- NEP-ALL-2010-11-06 (All new papers)
- NEP-CTA-2010-11-06 (Contract Theory & Applications)
- NEP-PBE-2010-11-06 (Public Economics)
- NEP-PUB-2010-11-06 (Public Finance)
- NEP-REG-2010-11-06 (Regulation)
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