Is the Non-disclosure Policy of Audit Intensity Always Effective? A Theoretical Exploration

Ma Yong, Deng Wanlin and Jiang Hao ()
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Ma Yong: College of Finance and Statistics, Hunan University, Changsha 410006, China
Deng Wanlin: College of Finance and Statistics, Hunan University, Changsha 410006, China
Jiang Hao: College of Finance and Statistics, Hunan University, Changsha 410006, China

The B.E. Journal of Economic Analysis & Policy, 2022, vol. 22, issue 4, 951-966

Abstract: This study theoretically explores the effectiveness of the non-disclosure policy of audit intensity using the portfolio choice approach. In our setting, audit intensity follows a two-state Markov chain, which is not disclosed by the tax authority, and agents will exploit the available information to learn the state and accordingly make tax evasion decisions. We find that the effectiveness of the non-disclosure policy in reducing tax evasion and increasing tax revenues depends on the proportion of time in the high-intensity state. Interestingly, when this proportion is high during a period, the disclosure policy is more effective.

Keywords: tax evasion; audits; non-disclosure policy; information learning (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1515/bejeap-2022-0163

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