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Tax evasion, corruption, and the remuneration of heterogeneous inspectors

Author

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  • Wane, Waly

Abstract

The author develops a general model for addressing the question of how to compensate tax inspectors in an economy where corruption is pervasive - a model that considers the existence of strategic transmission of information. Most of the literature on corruption assumes that the taxpayer and the tax inspector jointly decide on the income to report, which also determines the size of the bribe. In contrast, this model considers the more realistic case in which the taxpayer unilaterally chooses the income to report. The tax inspector cannot change the report and is faced with a binary choice: either he negotiates the bribe on the basis of the income report or he denounces the tax evader and therefore renounces the bribe. In his model, the optimal compensation scheme must take into account the strategic interaction between taxpayers and tax inspectors: a) Pure"tax farming"(paying tax inspectors a share of their tax collections) is optimal only when all tax inspectors are corruptible. b) When there are both honest and corruptible inspectors, the optimal compensation scheme lies between pure tax farming and a pure wage scheme. c) Paradoxically, when inspectors are hired beforehand, it may be optimal to offer contracts that attract corruptible inspectors but not honest ones.

Suggested Citation

  • Wane, Waly, 2000. "Tax evasion, corruption, and the remuneration of heterogeneous inspectors," Policy Research Working Paper Series 2394, The World Bank.
  • Handle: RePEc:wbk:wbrwps:2394
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Maxim Bouev, 2005. "State Regulations, Job Search and Wage Bargaining: A Study in the Economics of the Informal Sector," William Davidson Institute Working Papers Series wp764, William Davidson Institute at the University of Michigan.
    2. Fadi KANSO, "undated". "Wages and Penalties in Fighting Hierarchical Corruption (Tax Administration Case)," EcoMod2008 23800055, EcoMod.
    3. Fadi KANSO, 2007. "Wages and Sanctions against Hierarchical Corruption," CAE Working Papers 51, Aix-Marseille Université, CERGAM.
    4. Anastasios Xepapadeas & Yannis Petrohilos-Andrianos, "undated". "On the Evolution of Compliance and Regulation with Tax Evading Agents," DEOS Working Papers 1325, Athens University of Economics and Business.
    5. Diego Escobari, 2012. "Imperfect Detection of Tax Evasion in a Corrupt Tax Administration," Public Organization Review, Springer, vol. 12(4), pages 317-330, December.
    6. Lipatov, Vilen, 2008. "Social Interaction in Tax Evasion," MPRA Paper 8829, University Library of Munich, Germany.
    7. Pamela Jagger & Gerald Shively, 2015. "Taxes and Bribes in Uganda," Journal of Development Studies, Taylor & Francis Journals, vol. 51(1), pages 66-79, January.
    8. Lipatov, Vilen, 2003. "Evolution of Tax Evasion," MPRA Paper 966, University Library of Munich, Germany, revised 06 Dec 2005.

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