Penalties in the Theory of Equilibrium Tax Evasion: Solving King John’s Problem

Bernhard Neumärker and Gerald Pech
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Bernhard Neumärker: Department of Economics and Behavioral Sciences, University of Freiburg, Freiburg, Germany, bernhard.neumaerker@vwl.uni-freiburg.de
Gerald Pech: School of Management and Economics, Johannes-Gutenberg University, Mainz, Germany

Public Finance Review, 2011, vol. 39, issue 1, 5-24

Abstract: The authors characterize equilibria of an income reporting game with bounded returns and no commitment where detected tax evaders are charged the maximally feasible amount. Introducing partial commitment to punishment relief eliminates multiplicity of equilibria. The authors identify a unique limit equilibrium where the poorest citizens evade, intermediate citizens are honest, and the richest citizens are indifferent between evading and truth telling. For small tax rates and auditing cost, committing to a discretionary punishment relief scheme increases expected tax revenue.

Keywords: tax evasion; signaling; optimal punishment (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:sae:pubfin:v:39:y:2011:i:1:p:5-24

DOI: 10.1177/1091142110389600

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