Tax Evasion, Monopoly, and Nonneutral Profit Taxes

Kangoh Lee

National Tax Journal, 1998, vol. 51, issue 2, 333-38

Abstract: It is known in the literature that tax evasion does not influence the monopolist's output decision, and hence, profit taxes are neutral, even in the presence of tax evasion. This result is based on the assumption that the audit probability and the penalty rate are fixed or depend on the understatement or overstatement of relevant economic indicators. However, under alternative and perhaps more reasonable formulations of the audit probability, the neutrality of profit taxes may not be preserved. In particular, if the audit probability or the penalty rate varies with some reports made by the monopolist (such as reported cost or reported revenue or output level), then profit taxes are no longer neutral.

Date: 1998
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Persistent link: https://EconPapers.repec.org/RePEc:ntj:journl:v:51:y:1998:i:2:p:333-38

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