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Optimal tax enforcement under prospect theory

Amedeo Piolatto () and Gwenola Trotin ()
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Gwenola Trotin: EQUIPPE, Université Charles-de-Gaulle Lille 3 & GREQAM-IDEP, Université de la Mediterranée

No 2011/29, Working Papers from Institut d'Economia de Barcelona (IEB)

Abstract: Prospect Theory (PT) has become the most credited alternative to Expected Utility Theory (EUT) as a theory of decision under uncertainty. This paper characterises the optimal income tax and audit schemes under tax evasion, when taxpayers behave as predicted by PT. We show that the standard EUT results keep holding under PT, under even weaker conditions. Under fair assumptions on the reference income and on the utility function of taxpayers, we show that the optimal audit probability function is non-increasing and the optimal tax function is nondecreasing and concave.

Keywords: tax evasion; income tax enforcement; prospect theory (search for similar items in EconPapers)
JEL-codes: D81 H26 K42 (search for similar items in EconPapers)
Date: 2011
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