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Tax Evasion, Social Customs and Optimal Auditing

Author

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  • Myles, G.D.
  • Naylor, R.A.

Abstract

The optimal audit policy is analysed for an independent revenue service when a social custom exists that rewards honest tax-paying. The implication of the existence of the social custom is that in equilibrium the income level of a taxpayer cannot always be inferred exactly from their report. The structure of the optimal audit policy is determined both for a fixed (report-invariant) audit probability and for when the audit probability is a function of the income report. For the constant probability of audit it is shown that an interior solution exists to the decision problem of the revenue service and comparative statics results are given. When the audit probability can vary, the audit function is proved to be a decreasing function of the income report which reaches zero at the highest income report of a tax evader. Increases in the fine for evading and in the tax rate raise the optimal audit probability.

Suggested Citation

  • Myles, G.D. & Naylor, R.A., 1995. "Tax Evasion, Social Customs and Optimal Auditing," Discussion Papers 9508, Exeter University, Department of Economics.
  • Handle: RePEc:exe:wpaper:9508
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    Cited by:

    1. Roberto José Arias, 2004. "Reglas de selección para la fiscalización de Impuestos a las Ventas," Revista de Economía y Estadística, Universidad Nacional de Córdoba, Facultad de Ciencias Económicas, Instituto de Economía y Finanzas, vol. 0(2), pages 29-62, July.

    More about this item

    Keywords

    TAXATION;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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