Equilibrium Verification and Reporting Policies in a Model of Tax Compliance

Reinganum, Jennifer F.; Wilde, Louis L.

doi:10.2307/2526692

Cited by 239 publications

(136 citation statements)

References 19 publications

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“…We show that the sign of this bias could be ambiguous since a tax inspection could now serve as an instrument to correct for the excessive tax contribution made by taxpayers facing a high cost of suffering an inspection. This ambiguity concerning the effective progressiveness of the tax system is in stark contrast to what is obtained in the standard model of tax compliance with strategic interaction between auditors and taxpayers, where the resulting effective tax system is always more regressive than the statutory one (see Reinganum and Wilde, 1986;and Scotchmer, 1992).…”

Section: Introductionmentioning

confidence: 77%

“…It is a well established result in the literature that the effective tax rate displays less progressiveness than the statutory one when the relationship between auditors and taxpayers is strategic (see Reinganum and Wilde, 1986;and Scotchmer, 1992). This is so because the agency will audit individuals reporting low income more intensively than individuals producing high income reports.…”

Section: The Bias Of the Effective Tax Systemmentioning

confidence: 99%

“…According to this policy, taxpayers reporting less income than a given level are inspected, whereas the other taxpayers are not inspected. In a very influential paper the same authors (Reinganum and Wilde, 1986) considered an alternative scenario where a revenue-maximizing tax authority does not even commit to an audit rule but selects an optimal policy given the realization of the taxpayers' reports. Moreover, in this new framework the probability of inspection is allowed to take all the possible values in the interval [0,1].…”

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Cost Uncertainty and Taxpayer Compliance

Caballé

Panadés

2005

Int Tax Public Finan

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The existence of a private cost borne by audited taxpayers affects the tax enforcement policy. This is so because tax auditors will face now two sources of uncertainty, namely, the typical one associated with taxpayers' income and that associated with the taxpayers' idiosyncratic attitude towards tax compliance. Moreover, the inspection policy can be exposed to some randomness from the taxpayers' viewpoint due to the uncertainty about the audit cost borne by the tax authority. In this paper we provide an unified framework to analyze the effects of all these sources of uncertainty in a model of tax compliance with strategic interaction between auditors and taxpayers. We show that more variance in the distribution of the taxpayers' private cost of evading raises both tax compliance and the ex-ante welfare of taxpayers. The effects of the uncertainty about the audit cost faced by the tax authority are generally ambiguous. We also discuss the implications of our model for the regressive (or progressive) bias of the effective tax system. * This paper has benefited from comments made by participants in the Encuentro de Economia Pública (Santa Cruz de Tenerife) and by two anonymous referees of this Journal. Of course, they should not bear any responsibility for the remaining errors.

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Section: Introductionmentioning

confidence: 77%

Section: The Bias Of the Effective Tax Systemmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Cost Uncertainty and Taxpayer Compliance

Caballé

Panadés

2005

Int Tax Public Finan

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“…As an instrument that covers a broad range of transactions, ATRs must be distinguished from Advance Pricing Agreements (APAs), i.e., international ex ante bilateral or multilateral agreements between taxpayers and tax authorities on transfer pricing problems arising from crossborder transactions (De Waegenaere, Sansing, and Wielhouwer, 2007;Becker, Davies, and Jakobs, 2014; for an overview see Vollert, Eikel, and Sureth, 2013 Reinganum and Wilde, 1986); Erard and Feinstein, 1994). Therefore, the parties play a reporting game when not applying for an APA.…”

Section: Prior Literaturementioning

confidence: 99%

Boon or Bane? Advance Tax Rulings as a Measure to Mitigate Tax Uncertainty and Foster Investment

Diller

Kortebusch

Schneider

et al. 2016

European Accounting Review

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ABSTRACT:Politicians and tax practitioners often claim that tax uncertainty negatively affects investment. In many countries, firms can request fee-based Advance Tax Rulings (ATRs) to mitigate tax uncertainty. We analyze theoretically the circumstances under which investors request ATRs, how tax authorities should price them and how they can affect investment. We assume that tax authorities integrate investors' reasoning into their decisions. We determine the optimal fee tax authorities should charge. We find that in special cases this fee is prohibitively high, thus firms will refrain from requesting ATRs. However, we find that revenue-maximizing tax authorities offer ATRs if the ruling enables them either to significantly reduce their tax audit costs or to increase the probability of detecting ambiguous tax issues. Under certain circumstances, ATRs may effectively foster investment and potentially benefit both the tax authorities and taxpayers. Our results provide new explanations for why taxpayers that face high levels of tax uncertainty often do not request ATRs, even when the fee is rather low. Our results also hold when the tax authority maximizes social wealth instead of its revenues. Regulatory changes in ATR requirements might serve as a natural quasi-experiment for an empirical study of our predictions regarding investment decisions.

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“…Thus, Allingham and Sandmo (1972), Yitzhaki (1974) and Polinsky and Shavell (1979) consider the decision concerning evasion when all the taxpayers face a constant probability of auditing by the tax agency. This assumption was criticized by Reinganum and Wilde (1986), who point out that the tax report contains information about the true realization of the taxpayers' income and, consequently, that the probability of auditing should depend on the report made by the taxpayers. They model tax compliance as a game with incomplete information where first the tax payer reports his payoff, and then the tax auditing agency chooses the auditing probability depending on the payoff reported by the taxpayer.…”

Section: Related Literaturementioning

confidence: 99%

Disclosure of Corporate Tax Reports, Tax Enforcement, and Insider Trading

Caballé

Dumitrescu²

2015

SSRN Journal

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In this paper, we analyze the effects of disclosing corporate tax reports on the performance of financial markets and the use of asset prices by the tax enforcement agency in order to infer the true corporate cash flows. We model the interaction between a firm and the tax auditing agency, and highlight the role played by the tax report as a public signal used by the market dealer and the role of prices as a signal used by the tax authority. We discuss the determinants of both the reporting strategy of the firm and the auditing policy of the tax authority. Our model suggests that, despite disclosure of the tax reports being beneficial for market performance (as the spreads and trading costs are smaller than under no disclosure), the tax agency might have incentives to not disclose the tax report when its objective is to maximize expected net tax collection.

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Equilibrium Verification and Reporting Policies in a Model of Tax Compliance

Cited by 239 publications

References 19 publications

Cost Uncertainty and Taxpayer Compliance

Cost Uncertainty and Taxpayer Compliance

Boon or Bane? Advance Tax Rulings as a Measure to Mitigate Tax Uncertainty and Foster Investment

Disclosure of Corporate Tax Reports, Tax Enforcement, and Insider Trading

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