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Tax Riots

  • Christopher Phelan
  • Marco Bassetto

    ()

    (Department of Economics University of Minnesota)

This paper considers the existence of bad equilibria in a random auditing tax model with limits on the number of households which can be audited. Specifically, we present sufficient conditions for a tax-audit mechanism which has truth telling as one equilibrium to have other equilibiria in which households conceal income. Further, we present conditions such that the optimal tax-audit mechanism delivered by a standard mechanism design approach displays these characteristics. Our main idea is that in a realistic model of taxation and auditing, incentives which are sufficient to induce truth-telling when households expect other households to tell the truth are generally insufficient to induce truth telling when households expect other households to cheat

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File URL: http://www.econ.umn.edu/~bassetto/research/riots/taxriots.pdf
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Paper provided by Society for Economic Dynamics in its series 2005 Meeting Papers with number 433.

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Date of creation: 2005
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Handle: RePEc:red:sed005:433
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  1. Ennis, Huberto M. & Keister, Todd, 2005. "Government policy and the probability of coordination failures," European Economic Review, Elsevier, vol. 49(4), pages 939-973, May.
  2. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  3. Mikhail Golosov & Narayana Kocherlakota & Aleh Tsyvinski, 2002. "Optimal Indirect and Capital Taxation," NajEcon Working Paper Reviews 391749000000000449, www.najecon.org.
  4. Stefania Albanesi & Christopher Sleet, 2006. "Dynamic Optimal Taxation with Private Information," Review of Economic Studies, Oxford University Press, vol. 73(1), pages 1-30.
  5. Krasa, Stefan & Villamil, Anne P, 1994. "Optimal Multilateral Contracts," Economic Theory, Springer, vol. 4(2), pages 167-87, March.
  6. Moffitt, Robert, 1985. "Unemployment insurance and the distribution of unemployment spells," Journal of Econometrics, Elsevier, vol. 28(1), pages 85-101, April.
  7. Drew Fudenberg, 1995. "When Are Non-Anonymous Players Negligible?," Discussion Papers 1114, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. Jackson, Matthew O, 1991. "Bayesian Implementation," Econometrica, Econometric Society, vol. 59(2), pages 461-77, March.
  9. David K. Levine & Wolfgang Pesendorfer, 1995. "When Are Agents Negligible?," Levine's Working Paper Archive 96, David K. Levine.
  10. Jackson, Matthew O., 1999. "A Crash Course in Implementation Theory," Working Papers 1076, California Institute of Technology, Division of the Humanities and Social Sciences.
  11. Ennis, Huberto M. & Keister, Todd, 2005. "Optimal fiscal policy under multiple equilibria," Journal of Monetary Economics, Elsevier, vol. 52(8), pages 1359-1377, November.
  12. Mikhail Golosov & Aleh Tsyvinski, 2005. "Designing Optimal Disability Insurance: A Case for Asset Testing," Levine's Bibliography 784828000000000450, UCLA Department of Economics.
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