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Revenge, Tax Informing, and the Optimal Bounty

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  • Yaniv, Gideon

Abstract

A common belief is that the IRS pays tax informants 10% of whatever their tips produce in revenue. Actually, the bounty rate is even lower, averaging, in recent years, less than 2% of the amount of taxes and fines recovered. Why is it that the IRS is so tightfisted in rewarding informants who help recover taxes that otherwise would not have been recovered? The present paper approaches this question from an economic perspective, introducing a simple model of the informing decision, the implications of which are incorporated into the tax administration's problem of selecting a bounty rate, as well as a probability of convicting informed-upon evaders, that maximize its expected net revenues from tax informing. The paper shows that a revenue-maximizing tax administration would set its bounty rate lower and its prosecution efforts higher, the stronger, at the margin, informants' desire to get revenge on former parties with whom they have quarreled. While the IRS may be guided by ethical and moral considerations in designing its bounty scheme, it nevertheless behaves as if it were cynically exploiting informants' emotional drives, cutting down on their fair share in the recovered amounts to help finance its efforts in prosecuting informed-upon evaders. Copyright 2001 by Blackwell Publishing Inc.

Suggested Citation

  • Yaniv, Gideon, 2001. " Revenge, Tax Informing, and the Optimal Bounty," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 3(2), pages 225-233.
  • Handle: RePEc:bla:jpbect:v:3:y:2001:i:2:p:225-33
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    References listed on IDEAS

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    Cited by:

    1. Nir Dagan & Yossi Tobol, 2005. "Tax evasion, informants, and optimal auditing policy," Economic theory and game theory 021, Nir Dagan.
    2. Matthew Gould & Matthew Rablen, 2016. "Voluntary Disclosure Schemes for Offshore Tax Evasion: An Analysis," CESifo Working Paper Series 5750, CESifo Group Munich.
    3. repec:ebl:ecbull:v:8:y:2003:i:9:p:1-10 is not listed on IDEAS
    4. C├ęcile Bazart & Mickael Beaud & Dimitri Dubois, 2017. "Whistleblowing vs random audit: An experimental test of relative effciency," Working Papers 17-04, LAMETA, Universtiy of Montpellier.
    5. VafaI, Kouroche, 2005. "Abuse of authority and collusion in organizations," European Journal of Political Economy, Elsevier, vol. 21(2), pages 385-405, June.

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