The shadow price of a tax inspector
Theeffects of tax evasion on tax rates and government revenues have focused fresh attention on the question of tax administration. Because of the difficulties of measuring the consequences of good or bad administration, policymakers cannot rely on a wide range of specific information on this subject. This paper presents a model which shows the process of auditing tax returns as a decision tree. Using this model, governments can verify that the additional power is not abused and that the administration is efficient. The main idea is to introduce economic considerations into the process of selecting and inspecting tax returns. By calculating the investment in the inspector's time at each stage (the taxpayer is likely to appeal), and the increase in revenue that would result, it is possible to calculate the minimum amount of tax evasion that justifies continuing the audit - the shadow price of the tax inspector. If the guidelines are followed the productivity of the inspectors will increase as well.
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