A contest with the taxman - The impact of tax rates on tax evasion and wastefully invested resources
نویسنده
چکیده
We develop a moral hazard model with auditing where both the principal and the agent can inuence the probability that the true state of nature is veri ed. This setting is widely applicable for situations where fraudulent reporting with costly state veri cation takes place. However, we use the framework to investigate tax evasion. We model tax evasion as a concealment-detection contest between the taxpayer and the authority. We show that higher tax rates cause more evasion and increase the resources wasted in the contest. Additionally, we nd conditions under which a government should enforce incentive compatible auditing in order to reduce wasted resources. JEL-Classi cation: H26, D82, K42 Keywords: Tax Evasion, Auditing Rules, Contest, Moral Hazard Im very thankful for helpful comments from two anonymous referees and an associate editor. This paper has bene ted from suggestions by Frank Cowell, Margaret Bray, Jonathan Leape, Thomas Buettner, Leonardo Felli, and by the participants of various seminars at LSE, the EDP Jamboree Louvain, and ESAM 2003 in Sydney. yAdelaide University, School of Economics, North Terrace, Adelaide, SA 5005, Australia. Phone:+61(0)8-8303-5756 Fax: +61(0)8-8223-1460. Email: [email protected].
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