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Internal Control versus External Manipulation: A Model of Corporate Income Tax Evasion

Author

Listed:
  • Kong-Pin

    () (Academia Sinica, National Taiwan University)

  • C.Y. Cyrus Chu

    () (Academia Sinica)

Abstract

We offer a formal model of corporate income tax evasion. While individual tax evasion is essentially a portfolio-selection problem, corporate income tax evasion is much more complicated. When the owner of a firm decides to evade taxes, not only does she risk being detected by the tax authorities, more importantly, the optimal compensation scheme offered to the employees will also be altered. Specifically, due to the illegal nature of tax evasion, the contract offered to the manager is necessarily incomplete. This creates a distortion in the manager's effort and reduces the efficiency of the contract. Tax evasion thus increases the profit retained by the firm not only at the risk of being detected, but also at the cost of efficiency loss in internal control.

Suggested Citation

  • Kong-Pin & C.Y. Cyrus Chu, 2005. "Internal Control versus External Manipulation: A Model of Corporate Income Tax Evasion," RAND Journal of Economics, The RAND Corporation, vol. 36(1), pages 151-164, Spring.
  • Handle: RePEc:rje:randje:v:36:y:2005:1:p:151-164
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    More about this item

    Keywords

    Business Taxes and Subsidies including sales and value-added (VAT) Tax Evasion (Compliance; Collection) Evasion; Income Tax Evasion; Tax Evasion; Tax; Taxes;

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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