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Crime, Punishment and Tax

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  • Tabbach Avraham D.

    (Tel Aviv University, Ramat Aviv, Tel Aviv, Israel)

Abstract

This article studies the effects of income taxation on enforcement of business regulations. The key result is that income taxation makes it less socially costly to enforce the law and therefore allows the attainment of a higher level of deterrence. The explanation for this result is that income taxation reduces the gains businesses derive from violating the law, but it does not affect, at least not to the same extent, the feasible fine. This result is true, regardless of whether fines are deductible for tax purposes or not, as long as the probability and magnitude of fines optimally reflect tax rules and tax rates, as this article argues they should do. However, if the probability and magnitude of fines do not change in response to income tax changes, disallowing deductions for fines, which is the prevailing tax rule in many jurisdictions, is socially desirable for sufficiently low tax rates or tax rate changes.

Suggested Citation

  • Tabbach Avraham D., 2013. "Crime, Punishment and Tax," Review of Law & Economics, De Gruyter, vol. 9(1), pages 97-124, July.
    • Handle: RePEc:bpj:rlecon:v:9:y:2013:i:1:p:97-124:n:1
    DOI: 10.1515/rle-2012-0005
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    References listed on IDEAS

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    1. Gary S. Becker, 1974. "Crime and Punishment: An Economic Approach," NBER Chapters, in: Essays in the Economics of Crime and Punishment, pages 1-54, National Bureau of Economic Research, Inc.
    2. Kaplow, Louis, 1992. "The optimal probability and magnitude of fines for acts that definitely are undesirable," International Review of Law and Economics, Elsevier, vol. 12(1), pages 3-11, March.
    3. Polinsky, Mitchell & Shavell, Steven, 1979. "The Optimal Tradeoff between the Probability and Magnitude of Fines," American Economic Review, American Economic Association, vol. 69(5), pages 880-891, December.
    4. Nuno Garoupa, 1997. "The Theory of Optimal Law Enforcement," Journal of Economic Surveys, Wiley Blackwell, vol. 11(3), pages 267-295, September.
    5. Hillman, Arye L. & Katz, Eliakim, 1984. "Excise taxes, import restrictions, and the allocation of time to illegal income-earning activity," International Review of Law and Economics, Elsevier, vol. 4(2), pages 213-222, December.
    6. Nussim, Jacob & Tabbach, Avraham D., 2009. "Deterrence and tax treatment of monetary sanctions and litigation costs," International Review of Law and Economics, Elsevier, vol. 29(1), pages 1-7, March.
    7. Png, I. P. L. & Zolt, Eric M., 1989. "Efficient deterrence and the tax treatment of monetary sanctions," International Review of Law and Economics, Elsevier, vol. 9(2), pages 209-217, December.
    8. Bowles, Roger & Faure, Michael & Garoupa, Nuno, 2000. "Economic analysis of the removal of illegal gains," International Review of Law and Economics, Elsevier, vol. 20(4), pages 537-549, December.
    9. Lee, Dwight R., 1983. "On substituting a socially costless penalty for costly detection," International Review of Law and Economics, Elsevier, vol. 3(2), pages 179-185, December.
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