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Audits or Distortions: The Optimal Scheme to Enforce Self-Employment Income Taxes

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  • EDUARDO ZILBERMAN

Abstract

I investigate the optimal auditing scheme for a revenue-maximizing tax-collection agency that observes not only reported pro ts, but also the level of employment at each firm. Each firm is owned by a single entrepreneur whose managerial ability is random. The optimal auditing scheme is discontinuous and non-monotone in ability. In intermediate audit costs, less-productive entrepreneurs face auditing probabilities that increase in ability, whereas the ablest ones are not audited. Finally, the effecive tax rate is higher in the middle of the managerial ability distribution; thus, the overall regressive (or progressive) bias that arises from evasion is unknown.
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Suggested Citation

  • Eduardo Zilberman, 2016. "Audits or Distortions: The Optimal Scheme to Enforce Self-Employment Income Taxes," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 18(4), pages 511-544, August.
    • Handle: RePEc:bla:jpbect:v:18:y:2016:i:4:p:511-544
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    File URL: http://hdl.handle.net/10.1111/jpet.2016.18.issue-4
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    Cited by:

    1. Sebastián Castillo, 2024. "Tax policy design in a hierarchical model with occupational decisions," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 31(5), pages 1295-1341, October.
    2. López, José Joaquín, 2017. "A quantitative theory of tax evasion," Journal of Macroeconomics, Elsevier, vol. 53(C), pages 107-126.

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