Tax avoidance and optimal income tax enforcement

Duccio Gamannossi degl’Innocenti and Matthew Rablen
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Duccio Gamannossi degl’Innocenti: Institute for Fiscal Studies

No W17/08, IFS Working Papers from Institute for Fiscal Studies

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.

Keywords: Tax avoidance; Tax evasion; Optimal auditing; Tax administration (search for similar items in EconPapers)
JEL-codes: D82 H21 H26 K42 (search for similar items in EconPapers)
Date: 2017-06-07
New Economics Papers: this item is included in nep-acc, nep-iue, nep-law and nep-pbe
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