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Optimal taxes and penalties when the government cannot commit to its audit policy

  • Leandro Arozamena

    ()

  • Martin Besfamille

    ()

  • Pablo Sanguinetti

    ()

We examine the problem of a utilitarian government that sets taxes and fines for evaders but cannot commit to any enforcement policy. Given the tax law, the government and taxpayers —some of whom are honest— play a report-audit game that, depending on taxes, fines and audit costs, generates either full evasion and no audits, or partial evasion and random auditing. Anticipating both possibilities, we characterize the optimal tax law. We show that it may be optimal for the government not to fine evaders as a way to commit not to audit. Moreover, social welfare is nonmonotonic in the audit cost.

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File URL: http://www.utdt.edu/download.php?fname=_128810556784735400.pdf
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Paper provided by Universidad Torcuato Di Tella in its series Department of Economics Working Papers with number 2010-10.

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Length: 34 pages
Date of creation: Oct 2010
Date of revision:
Handle: RePEc:udt:wpecon:2010-10
Contact details of provider: Web page: http://www.utdt.edu/ver_contenido.php?id_contenido=439&id_item_menu=568

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