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Finding out who the crooks are - Tax evasion with sequential auditing

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Author Info
Ralph C Bayer (University of Adelaide)

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Abstract

This paper investigates multi-item moral hazard with auditing contests. Although the presented model is widely applicable, we choose tax evasion as an exemplary application. We introduce a tax-evasion model where tax authority and taxpayer invest in detection and concealment. The taxpayers have multiple potential income sources and are heterogeneous with respect to their evasion scruples. The tax authority - unable to commit to an audit strategy - observes a tax declaration and chooses its auditing efforts. We show that a tax inspector prefers to audit source by source until he finds evidence for evasion to conduct a full-scale audit thereafter.

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Paper provided by EconWPA in its series Public Economics with number 0412009.

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Date of creation: 14 Dec 2004
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Handle: RePEc:wpa:wuwppe:0412009

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Web page: http://129.3.20.41

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Related research
Keywords: Moral Hazard; Auditing Rules; Contest; Tax Evasion;

Find related papers by JEL classification:
H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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  1. Fahad Khalil, 1997. "Auditing Without Commitment," RAND Journal of Economics, The RAND Corporation, vol. 28(4), pages 629-640, Winter. [Downloadable!] (restricted)
  2. Graetz, Michael J & Reinganum, Jennifer F & Wilde, Louis L, 1986. "The Tax Compliance Game: Toward an Interactive Theory of Law Enforcement," Journal of Law, Economics and Organization, Oxford University Press, vol. 2(1), pages 1-32, Spring.
    Other versions:
  3. Robin Boadway & Motohiro Sato, 2000. "The Optimality of Punishing Only the Innocent: The Case of Tax Evasion," International Tax and Public Finance, Springer, vol. 7(6), pages 641-664, December. [Downloadable!] (restricted)
  4. Slemrod, Joel & Blumenthal, Marsha & Christian, Charles, 2001. "Taxpayer response to an increased probability of audit: evidence from a controlled experiment in Minnesota," Journal of Public Economics, Elsevier, vol. 79(3), pages 455-483, March. [Downloadable!] (restricted)
  5. Cremer, Helmuth & Gahvari, Firouz, 1996. "Tax evasion and the optimum general income tax," Journal of Public Economics, Elsevier, vol. 60(2), pages 235-249, May. [Downloadable!] (restricted)
  6. Kreps, David M. & Milgrom, Paul & Roberts, John & Wilson, Robert, 1982. "Rational cooperation in the finitely repeated prisoners' dilemma," Journal of Economic Theory, Elsevier, vol. 27(2), pages 245-252, August. [Downloadable!] (restricted)
  7. Cowell, F A, 1990. "Tax Sheltering and the Cost of Evasion," Oxford Economic Papers, Oxford University Press, vol. 42(1), pages 231-43, January. [Downloadable!] (restricted)
  8. Mookherjee, Dilip & Png, I P L, 1990. "Enforcement Costs and the Optimal Progressivity of Income Taxes," Journal of Law, Economics and Organization, Oxford University Press, vol. 6(2), pages 410-31, Fall.
  9. 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. [Downloadable!] (restricted)
  10. Milgrom, Paul & Roberts, John, 1982. "Predation, reputation, and entry deterrence," Journal of Economic Theory, Elsevier, vol. 27(2), pages 280-312, August. [Downloadable!] (restricted)
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  11. Border, Kim C & Sobel, Joel, 1987. "Samurai Accountant: A Theory of Auditing and Plunder," Review of Economic Studies, Blackwell Publishing, vol. 54(4), pages 525-40, October. [Downloadable!] (restricted)
  12. Ajzen, Icek, 1991. "The theory of planned behavior," Organizational Behavior and Human Decision Processes, Elsevier, vol. 50(2), pages 179-211, December. [Downloadable!] (restricted)
  13. Gideon Yaniv, 1999. "Tax Evasion, Risky Laundering, and Optimal Deterrence Policy," International Tax and Public Finance, Springer, vol. 6(1), pages 27-38, February. [Downloadable!] (restricted)
  14. 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)
  15. 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)
  16. 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)
  17. 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)
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