Tax Evasion and Limited Liability

K. L. Glen Ueng and C. C. Yang

Journal of Public Economic Theory, 2006, vol. 8, issue 3, 453-463

Abstract: Andreoni, Erard, and Feinstein (1998) suggest that imposing very high penalties for tax evasion is not possible under bankruptcy or limited liability constraints. In this paper, we complement their suggestion by showing that, in the presence of these constraints, imposing very high penalties can make an economy Pareto worse‐off. This result helps provide a further insight into why governments typically do not set very high penalties for tax evasion in practice. Implications for optimal deterrence policies in the context of tax evasion are also explored.

Date: 2006
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