A Contest with the Taxman - The Impact of Tax Rates on Tax Evasion and Wastefully Invested Resources

Ralph-C Bayer ()

No 2004-11, School of Economics and Public Policy Working Papers from University of Adelaide, School of Economics and Public Policy

Abstract: We develop a moral hazard model with auditing where both the principal and the agent can influence the probability that the true state of nature is verified. This setting is widely applicable for situations where fraudulent reporting with costly state verification takes place. However, we use the framework to investigate tax evasion. We model tax evasion as a concealment-detection contest between the taxpayer and the authority. We show that higher tax rates cause more evasion and increase the resources wasted in the contest. Additionally, we find conditions under which a government should enforce incentive compatible auditing in order to reduce wasted resources.

Keywords: tax evasion; auditing rules; contest; moral hazard (search for similar items in EconPapers)
JEL-codes: D82 H26 K42 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2004
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https://media.adelaide.edu.au/economics/papers/doc/wp2004-11.pdf (application/pdf)

Related works:
Journal Article: A contest with the taxman - the impact of tax rates on tax evasion and wastefully invested resources (2006)
Working Paper: A contest with the taxman - The impact of tax rates on tax evasion and wastefully invested resources (2004)
Working Paper: A Contest with the Taxman: The Impact of Tax Rates on Tax Evasion and Wastefully Invested Resources (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:adl:wpaper:2004-11

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