We examine the optimal auditing problem of a tax authority when taxpayers can choose both to evade and avoid. For a convex penalty function the incentive-compatibility constraints may bind for the richest taxpayer and at a positive level of both evasion and avoidance. The audit function is non-increasing in reported income, and is higher for progressive tax functions than for regressive tax functions. Higher marginal tax rates increase the incentives for non-compliance, overturning the well-known Yitzhaki paradox.
Gamannossi Degl'Innocenti, D., Rablen, M. D., Optimal Income Tax Enforcement in the Presence of Tax Avoidance, in Hashimzade, N. A. E. Y. (ed.), The Routledge Companion to Tax Avoidance Research, Routledge, Abingdon 2017: 340- 365. 10.4324/9781315673745-22 [http://hdl.handle.net/10807/134025]
Optimal Income Tax Enforcement in the Presence of Tax Avoidance
Gamannossi Degl'Innocenti, Duccio
;
2017
Abstract
We examine the optimal auditing problem of a tax authority when taxpayers can choose both to evade and avoid. For a convex penalty function the incentive-compatibility constraints may bind for the richest taxpayer and at a positive level of both evasion and avoidance. The audit function is non-increasing in reported income, and is higher for progressive tax functions than for regressive tax functions. Higher marginal tax rates increase the incentives for non-compliance, overturning the well-known Yitzhaki paradox.
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