Optimal Income Tax Enforcement under Prospect Theory

Prospect theory (PT) has become the most accepted alternative to expected utility theory (EUT) as a theory of decision under uncertainty. This paper extends the existing literature on efficient tax and audit schemes, by answering the question as to just how progressive an efficient tax system can be when assuming that taxpayers behave in line with the tenets of PT. Under reasonable assumptions regarding the reference income and the value function of taxpayers, we show that the efficient tax schedule is regressive while audit probabilities are nonincreasing in the declared income. These results are consistent with the previous literature on EUT.     

Modernization of Tax Administrations and Optimal Fiscal Policies

Since Sandmo (1981) , many articles have analyzed optimal fiscal policies in economies with tax evasion. All share a feature: they assume that the cost of enforcing the tax law is exogenous. However, governments often invest resources to reduce these enforcement costs. In a very simple model, we incorporate such investments in the analysis of an optimal fiscal policy. We characterize their optimal level and we show numerically how they interact with the other dimensions of the optimal fiscal policy. Finally, we highlight the differences between our results and those obtained in a model without investment in the tax administration.     

Tax Evasion,Corruption and Tax Loopholes

This paper addresses tax loopholes that allow firms to exploit borderline cases between legal tax avoidance and illegal tax evasion. In general, tax loopholes are detrimental to a revenue‐maximizing government. This may change in the presence of corruption in the tax administration. Tax loopholes may serve as a separating mechanism that helps governments maximize revenues and curb corruption, which may explain why developing countries only gradually close loopholes in their tax codes.     

Trading Off Tax Distortion and Tax Evasion

Income tax evasion is modeled as a risky activity and integrated into a standard optimal tax problem in which there is a good whose sales are observable. If the penalty for evasion is proportional to the tax evaded (the Yitzhaki scheme), the optimal tax structure is unaffected by evasion. If the penalty is proportional to unreported income (the Allingham–Sandmo scheme), it is efficient to tax both the observable good and income. The cost of the risk of tax evasion is traded off against the distortion from taxing the observable good. For equal penalties, Allingham/Sandmo is more efficient than Yitzhaki.     

Global Capital Tax as a Tool to Reduce Tax Evasion

International Advances in Economic Research -     

Tax Evasion and Limited Liability

Andreoni, Erard, and Feinstein (1998) suggest that imposing very high penalties for tax evasion is not possible under bankruptcy or limited liability constraints. In this paper, we complement their suggestion by showing that, in the presence of these constraints, imposing very high penalties can make an economy Pareto worse‐off. This result helps provide a further insight into why governments typically do not set very high penalties for tax evasion in practice. Implications for optimal deterrence policies in the context of tax evasion are also explored.     

税务违章行为辨析--论偷税、漏税、欠税、抗税的政策界定

我国现行税法对各种税务违章行为的界定极不严密，给实际违章鉴定工作留下许多可以“灵活”解释的余地。国家应进一步修改和完善《税收征管法》，重新明确界定各种税务违章行为，改变“偷税＝漏税＝欠税＝抗税”的状况，以确保税收征管的客观性和准确性，切实维护国家和纳税人的合法权益。     

Tax Liability and Tax Evasion in a Competitive Labor Market

In a competitive labor market, a change in the legal incidence of a tax on labor will not alter employment if tax obligations are fulfilled. However, this irrelevance result may no longer apply if taxes can be evaded. In particular, a shift from payroll to income taxes will lower employment. This will be the case if workers exhibit constant absolute risk aversion, have a utility function, which is strongly separable in income and the disutility from working, and the penalty for evasion is not proportional to the amount of taxes evaded. Accordingly, tax evasion opportunities can make the legal incidence of a tax on labor an important determinant of its economic incidence.     

Quantitative Import Restrictions and Optimal Capital Taxes Under a System of Tax Credits

This paper examines the optimal capital tax policy under quantitative import constraints, and international capital tax credits. For a small capital-importing country, the optimal capital tax equals the foreign tax under a quota, and equals or exceeds the foreign tax under a VER. For a small capital-exporting country, the optimal policy towards capital is a zero tax under a quota, and a tax or a subsidy under a VER. Also examined are the welfare effects of capital taxes and trade liberalization, and the joint setting of the two policies, when both instruments are available to the government.     

Tax Overpayments, Tax Evasion, and Book-Tax Differences

A strictly risk-averse manager makes joint decisions on a firm's tax payments and book profit declarations according to accounting standards. It is analyzed how the incentives to overpay or evade taxes and to inflate book profits are influenced by (1) the composition of the manager's remuneration, (2) the ability to control the manager's actions, (3) the costs of making untruthful profit declarations, and (4) the tax rate. If the firm's owner or the government take into account these effects when pursuing their own objectives, the changes in tax payments and book profit declarations become theoretically more ambiguous.     

税收流失中的双委托-多代理问题

本文首次给出了税收流失问题中的多委托—多代理模型分析框架,并将政府、国税局和地税局、纳税人置于统一的博弈框架下,作为博弈的三方进行讨论。只要政府给国税局和地税局以适当的激励,政府仍然能设计出让纳税人"诚实"申报的显示机制;国税局和地税局作为税收征管者和纳税人之间的博弈可以看成是一个双委托—代理问题,此时税收征收上的"正外部性"和税收监菅上的"搭便车"效应将是双委托—代理问题中的新现象。     

Itemised Deductions: A Device to Reduce Tax Evasion

With direct incentives and sanctions being the most common instruments to fight tax evasion, the theoretical literature has tended to overlook indirect schemes, such as itemised deductions, in which one agent's behaviour affects the likelihood that others will declare their revenue. Itemised deductions provide an incentive for consumers to declare their purchases. This induces a partial shift in the demand from the black market to the legal one, for consumers need a transaction receipt to enjoy the tax deduction. I show that it is possible to increase tax proceeds by choosing a suitable level of itemised deduction, and this, for any level of taxation. Indeed, the cost for the tax authority on the consumers' side is more than compensated for by the extra proceeds generated on the sellers' side.     

Tax Evasion,Corruption and Market Entry

We analyze the impact of tax policy on the market entry of firms in the presence of corruption and tax evasion. In a world with corruption, firms must bribe corrupt officials to enter the market. For a given level of bribes, higher tax rates and stricter enforcement of taxation decrease tax evasion but typically reduce market entry. However, when the level of bribes reacts to tax policy, higher taxes and stricter enforcement of taxation can have a double benefit. Up to a certain threshold, for which we develop a simple rule, stricter enforcement increases market entry and reduces tax evasion.     

Fiscal Equalization and Tax Enforcement

In many countries organized as federations, fiscal equalization schemes have been implemented to mitigate vertical or horizontal imbalances. Such schemes usually imply that the member states of the federation can only partly internalize (marginal) tax revenue before redistribution. Aside from the internalized marginal revenue, referred to as the marginal tax‐back rate, the remainder is redistributed. We investigate the extent to which state‐level authorities in such federation under‐exploit their tax bases. By means of a stylized model, we show that the member states have an incentive to align the effective tax rates on their residents with the level of the marginal tax‐back rate. We empirically test the model using state‐level and micro‐level taxpayer data, OLS regressions and natural experiments. Our empirical findings support the results from our theoretical model. Particularly, we find that states with a higher marginal tax‐back rate exploit the tax base to a higher extent.     

Optimal Commodity Taxes in Australia

The recent changes to commodity taxes in Australia have led to renewed interest in a classic question in public finance: should the tax rates be uniform or differentiated? This article attempts to answer this question by calculating optimal commodity taxes in Australia for a nine‐item disaggregation. The estimates point to non‐uniform commodity taxes, even from the viewpoint of an inequality‐insensitive tax planner. The optimal commodity taxes bear little resemblance with the pre‐GST or post‐GST tax rates. No less significant is our observation that even the purely efficiency‐driven optimal commodity taxes imply lower real expenditure inequality than the actual taxes.     

Income Tax Evasion in a Unionised Labour Market

Labour market outcomes can depend on tax evasion since the returns from working are affected by the amount of taxes paid. In this paper, unionised workers are assumed to select the income which they declare. The rational trade union takes this decision into account. It is shown that the employment effects of a linear income tax are not altered qualitatively by tax evasion if the fine for evasion is a function only of the evaded tax. Moreover, the consequences of changes in the tax enforcement system are determined by the ability to choose evasion activities optimally. The existence of unrestricted tax evasion opportunities lowers wages.     

Estimates of Cash-Based Income Tax Evasion in Australia

This article provides new estimates of the size of the cash economy in Australia over the period from 1950–51 to 1989–90. This series is used to estimate income tax revenue losses for each year and to examine the factors which influence the incentive to evade income tax.     

Tax Evasion and the Time Consistency of the Government's Income Tax Policy

It is shown that it is not necessarily optimal for the government to tax capital income at a high rate even when capital is in fixed supply because the supply of capital for tax purposes may be elastic if capital income tax evasion occurs. An example is given where the wage tax rate is positive and greater than the interest income tax rate even though capital is in fixed supply. Conditions are also derived under which the capital income tax rate is lower in the closed-loop policy game, where capital is fixed, than in the open-loop game, where it is not.
JEL Classification Numbers: E61, H26.     

Costly Tax Enforcement and Financial Repression

Using an overlapping generations production‐economy model characterized by financial repression, purposeful government expenditures and cost of tax collection, we analyse whether financial repression can be explained by the cost of raising taxes. We show that with public expenditures affecting utility of the agents, modest costs of tax collection tend to result in financial repression being pursued as an optimal policy by the consolidated government. However, when public expenditures are purposeless, the above result only holds for relatively higher costs of tax collection. But, more importantly, costs of tax collection cannot produce a monotonic increase in the reserve requirements. What are critical, in this regard, are the weights the consumer assigns to the public good in the utility function and the size of the government.     

Nonpoint Source Pollution Taxes and Excessive Tax Burden

If a regulator is unable to measure firms’ individual emissions, an ambient tax can be used to achieve the socially desired level of pollution. With this tax, each firm pays a unit tax on aggregate emissions. In order for the tax to be effective, firms must recognize that their decisions affect aggregate emissions. When firms behave strategically with respect to the tax-setting regulator, under plausible circumstances their tax burden is lower under an ambient tax, relative to the tax which charges firms on the basis of individual emissions. Firms may prefer the case where the regulator is unable to observe individual firm emissions, even if this asymmetric information causes the regulator to tax each firm on the basis of aggregate emissions.