Corporate tax evasion with agency costs |
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| Institution: | 1. Department of Public Finance, University of Innsbruck, Austria;2. Department of Economics, University of Innsbruck, Austria;3. Department of Economics, University of Cologne, Germany;1. School of Accounting and Finance, The Business School, University of Adelaide, 10 Pulteney Street, Adelaide, South Australia 5005, Australia;2. School of Accounting, Curtin Business School, Curtin University, GPO Box U1987, Perth, Western Australia 6845, Australia;3. School of Accounting, UTS Business School, University of Technology — Sydney, Corner of Quay Street and Ultimo Road, Haymarket, Sydney, New South Wales 2000, Australia |
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| Abstract: | This paper examines corporate tax evasion in the context of the contractual relationship between the shareholders of a firm and a tax manager who possesses private information regarding the extent of legally permissible reductions in taxable income, and who may also undertake illegal tax evasion. Using a costly state falsification framework, we characterize formally the optimal incentive compensation contract for the tax manager and, in particular, how the form of that contract changes in response to alternative enforcement policies imposed by the taxing authority. The optimal contract may adjust to offset, at least partially, the effect of sanctions against illegal evasion, and we find a new and policy-relevant non-equivalence result: penalties imposed on the tax manager are more effective in reducing evasion than are those imposed on shareholders. |
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