Tax riots

Marco Bassetto and Christopher Phelan

No WP-06-04, Working Paper Series from Federal Reserve Bank of Chicago

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.

Keywords: Taxation; Households (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-pbe and nep-pub
Date: 2006
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Related works:
Working Paper: Tax Riots (2004)
Working Paper: Tax Riots (2005)
Journal Article: Tax Riots (2008)
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