Organization of the state inspections and suppression of corruption

The state inspections play an important role in the modern economy. There are two main directions of their activity. The rst one is collection of payments to the state budget. The tax inspections and the customs control the payment's values and check exemptions from payments for di erent economic agents. The agency should prevent tax or customs evasion but not interfere with the agents eligible for exemption from the payment. The second direction is concerned with prevention of the law infringement. Police, sanitary, rework inspection and others deal with this task. The e ciency of an inspection should be measured by the social welfare increase proceeding from its activity. For many countries in transition, in particular for Russia, corruption is the most important problem in inspections' organization. Bribery is one form of corruption that is the most di cult to reveal. There exists a wide literature that discusses problems of optimal inspection organization (in particular for tax inspection) and the problem of corruption. The rst type of models (see Srinivasan (1973)) studies the interaction between the tax authority and a group of taxpayers, whose income is random, without taking into account the possibility of corruption. It is assumed that at the end of the accounting period each taxpayer declares his/her income to the tax inspectors. The reported income is taxed according to the given tax rates. However, a taxpayer may try to hide some part of income by underreporting. If the taxpayer is audited, the inspector will inevitably uncover the true level of income. The detected tax evader is ned and made to pay the evaded tax. Further, it is assumed that auditing is costly and that the central authority is interested in maximizing net tax revenue (i.e. the sum of taxes and penalties minus expenditures on audits) given the tax rates, nes and the costs of auditing. In the case of a homogeneous group of taxpayers, the only taxpayer-speci c information available to the tax authority is the declared incomes. Thus, the authority must determine the probability of audit, using these declarations. The purpose of this model is to nd the optimal auditing rule given the tax rates and income distribution. Chander, Wilde (1992) and Vasin, Panova (2000) extend the previous model by taking corruption into account. The model assumes that a tax inspector, which has discovered an instance of tax evasion, may bargain with the detected evader over the size of a bribe given in exchange for not revealing the evasion. In order to prevent this kind of corruption, the authority chooses to review some of the inspectors' audits and res those inspectors who have not reported tax evasion. Thus, the authority's problem is to choose the frequencies of both levels of audit the audit of taxpayers by inspectors and the review of audits from the center as well as inspectors salary. There are two variants of the optimal strategy depending on parameters of the model: