Optimal taxes and penalties when the government cannot commit to its audit policy

Leandro Arozamena, Martin Besfamille and Pablo Sanguinetti

Department of Economics Working Papers from Universidad Torcuato Di Tella

Abstract: We examine the problem of a utilitarian government that sets taxes and fines for evaders but cannot commit to any enforcement policy. Given the tax law, the government and taxpayers —some of whom are honest— play a report-audit game that, depending on taxes, fines and audit costs, generates either full evasion and no audits, or partial evasion and random auditing. Anticipating both possibilities, we characterize the optimal tax law. We show that it may be optimal for the government not to fine evaders as a way to commit not to audit. Moreover, social welfare is nonmonotonic in the audit cost.

Keywords: Tax rates; Tax evasion; Enforcement; Audit costs; No commitment; Mixed-strategy equilibrium. (search for similar items in EconPapers)
JEL-codes: D82 H26 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2010-10
New Economics Papers: this item is included in nep-acc, nep-cta, nep-pbe, nep-pub and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:udt:wpecon:2010-10

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