Tax evasion, corruption, and the remuneration of heterogeneous inspectors

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Tax evasion, corruption, and the remuneration of heterogeneous inspectors

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Wane, Waly

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Waly Wane

Abstract

The author develops a general model for addressing the question of how to compensate tax inspectors in an economy where corruption is pervasive - a model that considers the existence of strategic transmission of information. Most of the literature on corruption assumes that the taxpayer and the tax inspector jointly decide on the income to report, which also determines the size of the bribe. In contrast, this model considers the more realistic case in which the taxpayer unilaterally chooses the income to report. The tax inspector cannot change the report and is faced with a binary choice: either he negotiates the bribe on the basis of the income report or he denounces the tax evader and therefore renounces the bribe. In his model, the optimal compensation scheme must take into account the strategic interaction between taxpayers and tax inspectors: a) Pure"tax farming"(paying tax inspectors a share of their tax collections) is optimal only when all tax inspectors are corruptible. b) When there are both honest and corruptible inspectors, the optimal compensation scheme lies between pure tax farming and a pure wage scheme. c) Paradoxically, when inspectors are hired beforehand, it may be optimal to offer contracts that attract corruptible inspectors but not honest ones.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2394.

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Date of creation: 31 Jul 2000
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Handle: RePEc:wbk:wbrwps:2394

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References listed on IDEAS
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.:

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Other versions:
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Other versions:
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Other versions:
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Other versions:
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Full references

Cited by:
(explanations, 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.)

Lipatov, Vilen, 2008. "Social Interaction in Tax Evasion," MPRA Paper 8829, University Library of Munich, Germany. [Downloadable!]
Lipatov, Vilen, 2003. "Evolution of Tax Evasion," MPRA Paper 966, University Library of Munich, Germany, revised 06 Dec 2005. [Downloadable!]
Maxim Bouev, 2005. "State Regulations, Job Search and Wage Bargaining: A Study in the Economics of the Informal Sector," William Davidson Institute Working Papers Series wp764, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]

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