Tax Riots

Christopher Phelan and Marco Bassetto

No 375, 2004 Meeting Papers from Society for Economic Dynamics

Abstract: This paper considers the existence of bad equilibria in a random auditing tax model with limits on the number of households which can be audited. Specifically, we present sufficient conditions for a tax-audit mechanism which has truth telling as one equilibrium to have other equilibiria in which households conceal income. Further, we present conditions such that the optimal tax-audit mechanism delivered by a standard mechanism design approach displays these characteristics. Our main idea is that in a realistic model of taxation and auditing, incentives which are sufficient to induce truth-telling when households expect other households to tell the truth are generally insufficient to induce truth telling when households expect other households to cheat

Keywords: taxation; audits; mechanism design (search for similar items in EconPapers)
JEL-codes: H21 H26 (search for similar items in EconPapers)
Date: 2004

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Related works:
Working Paper: Tax riots (2006)
Working Paper: Tax Riots (2005)
Journal Article: Tax Riots (2008)
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Persistent link: http://EconPapers.repec.org/RePEc:red:sed004:375

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