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Public Organization Review

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01.12.2012

Imperfect Detection of Tax Evasion in a Corrupt Tax Administration

verfasst von: Diego Escobari

Erschienen in: Public Organization Review | Ausgabe 4/2012

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Abstract

This article models the imperfect detection of tax evasion motivated by the existence of a corrupt tax administration. Consistent with previous literature, fines and audit probabilities both have a positive effect on compliance. Moreover, the model shows that they have a negative effect on the bribes paid to corrupt tax officials. More corruption decreases compliance levels, giving honest auditors incentives to work harder to detect evasion. Giving inspectors a share of the detected evasion (tax farming) makes auditors work harder; however, increasing their wages reduces their exerted effort to discover evasion. Higher compliance can as well be achieved by hiring more efficient inspectors.

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For a survey of the literature on tax evasion, see Andreoni et al. (1998) and Slemrod and Yitzhaki (2002). For a survey on corruption, see Jain (2001).

There exists the problem of moral hazard because the exerted effort cannot be observed. There exists the problem of adverse selection because not all potential tax inspectors can be identified as being honest or dishonest.

Lee (2001) presents a model where the amount of evasion found depends on the taxpayer’s self-insurance.

EURDP considers the possibility that indifference curves be kinked at the certainty point implying that reporting the true level of income can be optimal. The weighting function used in Bernasconi (1998) and obtained by Camerer and Ho (1994) is f(p) = 1-(1-p) ^γ /[p ^γ + (1-p) ^γ ] ^1/γ, where γ = 0.56.

The Gauss code used to solve the model is available from the author upon request. The code uses the library NLSYS Version 3.1.2. The algorithm used is line search and the jacobian is calculated using forward difference.

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Titel: Imperfect Detection of Tax Evasion in a Corrupt Tax Administration
verfasst von: Diego Escobari
Publikationsdatum: 01.12.2012
Verlag: Springer US
Erschienen in: Public Organization Review / Ausgabe 4/2012
Print ISSN: 1566-7170
Elektronische ISSN: 1573-7098
DOI: https://doi.org/10.1007/s11115-011-0172-5

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