Penalties in the theory of equilibrium tax evasion: Solving King John's problem
AbstractWe characterize equilibria of an income reporting game with bounded returns and no commitment where detected tax evaders are charged the maximally feasible amount. Introducing partial commitment to punishment relief eliminates multiplicity of equilibria. We identify a unique limit equilibrium where the poorest citizens evade, intermediate citizens are honest and the richest citizens are indifferent between evading and truth-telling. For small tax rates and auditing cost, committing to a discretionary punishment relief scheme increases expected tax revenue. --
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Bibliographic InfoPaper provided by University of Freiburg, Department of Economic Policy and Constitutional Economic Theory in its series The Constitutional Economics Network Working Papers with number 01-2010.
Date of creation: 2010
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Tax evasion; signaling; optimal punishment;
Other versions of this item:
- Bernhard Neumärker & Gerald Pech, 2011. "Penalties in the Theory of Equilibrium Tax Evasion: Solving King John's Problem," Public Finance Review, , vol. 39(1), pages 5-24, January.
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion
- K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
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