Feasible Net Income Distributions under Income Tax Evasion: An Equilibrium Analysis

Abstract

We investigate how redistribution of

Optimal Taxes and Penalties When the Government Cannot Commit to Its Audit Policy

“…Our paper is also related to Graetz et al (1986), Reinganum and Wilde (1986), Erard and Feinstein (1994), Landsberger et al (2000) and Liang and Yang (2008). These contributions analyze equilibrium models of tax enforcement when the tax administration audits a fraction of reported incomes, not following a prescribed policy but instead maximizing its own criterion ex post.…”

“…In fact, extra taxes and fines just cover the audit cost. Therefore, as stated by Landsberger et al (2000), the enforcement of the tax law only contributes to tax collection indirectly, via the reporting strategies of dishonest rich taxpayers.…”

The Cutoff Policy of Taxation when Taxpayers are Risk Averse

“…As we rule out rewards to honest taxpayers by assumption 7 , a taxpayer will report y ≤ w, where w > 0 denotes the true income. A rational taxpayer who earned a true income w will choose to report the income y * that maximizes her expected utility…”

“…6 We stick to the standard assumption that detection of tax evasion occurs with probability 1 whenever the tax report is false and an audit is run. 7 This is also a standard assumption, even if the theory of optimal auditing provides reasons in favor of rewards to audited honest risk-averse taxpayers (see Mookherjee and Png [10]). …”

“…[11], [13], [5], [12], and, for a generalization, [3]), mainly as an efficient strategy in agency models in which the Tax Administration as a principal can commit to a given audit policy. A cutoff property has, however, been shown to hold also for equilibrium in the taxation game under given conditions [7].…”