Corporate Tax Evasion with Agency Costs

Keith J. Crocker and Joel Slemrod

No 10690, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper examines corporate tax evasion in the context of the contractual relationship between the shareholders of a firm and a tax manager who possesses private information regarding the extent of legally permissible reductions in taxable income, and who may also undertake illegal tax evasion. Using a costly state falsification framework, we characterize formally the optimal incentive compensation contract for the tax manager and, in particular, how the form of that contract changes in response to alternative enforcement policies imposed by the taxing authority. The optimal contract may adjust to offset, at least partially, the effect of sanctions against illegal evasion, and we find a new and policy-relevant non-equivalence result: penalties imposed on the tax manager are more effective in reducing evasion than are those imposed on shareholders.

JEL-codes: H25 H26 (search for similar items in EconPapers)
Date: 2004-08
New Economics Papers: this item is included in nep-pbe
Note: PE
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Citations: View citations in EconPapers (4)

Published as Crocker, Keith J. and Joel Slemrod. "Corporate Tax Evasion With Agency Costs," Journal of Public Economics, 2005, v89(9-10,Sep), 1593-1610.

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Journal Article: Corporate tax evasion with agency costs (2005)
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