Financial Contracting with Tax Evaders

Philipp Meyer-Brauns

Working Papers from Max Planck Institute for Tax Law and Public Finance

Abstract: This paper derives the optimal financial contract when an entrepreneur can evade taxes in a model of costly state verification. In contrast to the previous literature, we find that standard debt contracts are not optimal when tax evasion is possible. Instead, the optimal contract is debt-like only for very low and very high profit realizations, and features a constant repayment and verification of returns in an intermediate range. This occurs because the entrepreneur has to be given a positive rent even under verification in order to not abuse her limited liability protection for excessive tax evasion activities.

Keywords: financial contracting; security design; corporate tax evasion; costly state verification (search for similar items in EconPapers)
JEL-codes: D82 D86 G3 H25 H26 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2014-01
New Economics Papers: this item is included in nep-cta, nep-iue, nep-mic and nep-pbe
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Persistent link: https://EconPapers.repec.org/RePEc:mpi:wpaper:tax-mpg-rps-2014-01

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