Tax Riots

Marco Bassetto and Christopher Phelan

Review of Economic Studies, 2008, vol. 75, issue 3, pages 649-669

Abstract: This paper considers an optimal taxation environment where household income is private information, and the government randomly audits and punishes households found to be underreporting. We prove that the optimal mechanism derived using standard mechanism design techniques has a bad equilibrium (a tax riot) where households underreport their incomes, precisely because other households are expected to do so as well. We then consider three alternative approaches to designing a tax scheme when one is worried about bad equilibria. Copyright © 2008 The Review of Economic Studies Limited.

Date: 2008
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Related works:
Working Paper: Tax riots (2006)
Working Paper: Tax Riots (2004)
Working Paper: Tax Riots (2005)
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