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Penalties in the Theory of Equilibrium Tax Evasion: Solving King John’s Problem

Author

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  • Bernhard Neumärker

    (Department of Economics and Behavioral Sciences, University of Freiburg, Freiburg, Germany, bernhard.neumaerker@vwl.uni-freiburg.de)

  • Gerald Pech

    (School of Management and Economics, Johannes-Gutenberg University, Mainz, Germany)

Abstract

The authors characterize equilibria of an income reporting game with bounded returns and no commitment where detected tax evaders are charged the maximally feasible amount. Introducing partial commitment to punishment relief eliminates multiplicity of equilibria. The authors identify a unique limit equilibrium where the poorest citizens evade, intermediate citizens are honest, and the richest citizens are indifferent between evading and truth telling. For small tax rates and auditing cost, committing to a discretionary punishment relief scheme increases expected tax revenue.

Suggested Citation

  • Bernhard Neumärker & Gerald Pech, 2011. "Penalties in the Theory of Equilibrium Tax Evasion: Solving King John’s Problem," Public Finance Review, , vol. 39(1), pages 5-24, January.
  • Handle: RePEc:sae:pubfin:v:39:y:2011:i:1:p:5-24
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    Cited by:

    1. Oberlack, Christoph & Neumärker, Bernhard, 2011. "Economics, institutions and adaptation to climate change," The Constitutional Economics Network Working Papers 04-2011, University of Freiburg, Department of Economic Policy and Constitutional Economic Theory.
    2. Pickhardt, Michael & Prinz, Aloys, 2014. "Behavioral dynamics of tax evasion – A survey," Journal of Economic Psychology, Elsevier, vol. 40(C), pages 1-19.

    More about this item

    Keywords

    tax evasion; signaling; optimal punishment;

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