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Tax Compliance by Firms and Audit Policy

  • Ralph-C Bayer

    ()

    (School of Economics, University of Adelaide)

  • Frank Cowell

Firms are usually better informed than tax authorities about market conditions and the potential profits of competitors. They may try to exploit this situation by under-reporting their own taxable profits. The tax authority could offset firms' informational advantage by adopting "smarter" audit policies that take into account the relationship between a firm's reported profits and reports for the industry as a whole. Such an audit policy will create an externality for the decision makers in the industry and this externality can be expected to affect not only firms' reporting policies but also their market decisions. If public policy takes into account wider economic issues than just revenue raising what is the appropriate way for a tax authority to run such an audit policy? We develop some clear policy rules in a standard model of an industry and show the effect of these rules using simulations.

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File URL: http://www.economics.adelaide.edu.au/research/papers/doc/wp2010-23.pdf
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Paper provided by University of Adelaide, School of Economics in its series School of Economics Working Papers with number 2010-23.

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Length: 31 pages
Date of creation: Oct 2010
Date of revision:
Handle: RePEc:adl:wpaper:2010-23
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Web page: http://www.economics.adelaide.edu.au/

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  1. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 323-338, November.
  2. Cowell, F.A., 1989. "Honesty is sometimes the best policy," European Economic Review, Elsevier, vol. 33(2-3), pages 605-617, March.
  3. Frank A. Cowell, 1990. "Cheating the Government: The Economics of Evasion," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262532484.
  4. Marrelli, M. & Martina, R., 1988. "Tax evasion and strategic behaviour of the firms," Journal of Public Economics, Elsevier, vol. 37(1), pages 55-69, October.
  5. Ralph Bayer & Frank A Cowell, 2006. "Tax Compliance and Firms’ StrategicInterdependence," STICERD - Distributional Analysis Research Programme Papers 81, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  6. Lee, Kangoh, 1998. "Tax Evasion, Monopoly, and Nonneutral Profit Taxes," National Tax Journal, National Tax Association, vol. 51(n. 2), pages 333-38, June.
  7. Kolm, Serge-Christophe, 1973. "A note on optimum tax evasion," Journal of Public Economics, Elsevier, vol. 2(3), pages 265-270, July.
  8. Martin Besfamille & Philippe De Donder & Jean Marie Lozachmeur, 2009. "Tax enforcement may decrease government revenue," Economics Bulletin, AccessEcon, vol. 29(4), pages 2665-2672.
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