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Corruption, Tax Evasion and the Laffer Curve

Author

Listed:
  • Ira N. Gang

    (Rutgers University)

  • Amal Sanyal

    (Lincoln University, Canterbury, New Zealand)

  • Omkar Goswami

    (Indian Statistical Institute - Delhi Centre)

Abstract

We introduce bureaucratic corruption in a simple way and examine its effect on government revenue when policies change. We show that a rise in the tax rate can lead to a fall in net revenue--a Laffer curve result due to the proportion of auditors that are corrupt and enforcement costs. It may pay for the government to lower audit probabilities and induce cheating. If corruption is low enough, revenues garnered from capturing people cheating may exceed those from choosing an audit structure in which everyone declares their true income. We also examine a case in which corruption is endogenous.

Suggested Citation

  • Ira N. Gang & Amal Sanyal & Omkar Goswami, 1998. "Corruption, Tax Evasion and the Laffer Curve," Departmental Working Papers 199604, Rutgers University, Department of Economics.
    • Handle: RePEc:rut:rutres:199604
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    More about this item

    Keywords

    auditing; bureaucracy; corruption; laffer curve; tax evasion;
    All these keywords.

    JEL classification:

    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development

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