A General Characterization of Optimal Income Tax Enforcement
This paper develops a general approach to characterizing optimal income tax and enforcement schemes. The authors' analysis clarifies the nature of the interplay between tax rates, audit probabilities, and penalties for misreporting. In particular, it is shown that, for a variety of objective functions for the principal, the optimal tax schedule is in general concave (at least weakly) and monotonic; the marginal tax rates determine the audit probabilities; and less harsh penalties lead to higher enforcement costs. The authors' results imply that there exists a trade-off between equity and efficiency considerations in the enforcement context which is similar to that in the moral hazard context for tax policy. Copyright 1998 by The Review of Economic Studies Limited.
Volume (Year): 65 (1998)
Issue (Month): 1 (January)
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