Penalties in the theory of equilibrium tax evasion: Solving King John's problem

Bernhard Neumärker and Gerald Pech ()

No 01-2010, The Constitutional Economics Network Working Papers from University of Freiburg, Department of Economic Policy and Constitutional Economic Theory

Abstract: We characterize equilibria of an income reporting game with bounded returns and no commitment where detected tax evaders are charged the maximally feasible amount. Introducing partial commitment to punishment relief eliminates multiplicity of equilibria. We identify a unique limit equilibrium where the poorest citizens evade, intermediate citizens are honest and the richest citizens are indifferent between evading and truth-telling. For small tax rates and auditing cost, committing to a discretionary punishment relief scheme increases expected tax revenue.

Keywords: Tax evasion; signaling; optimal punishment (search for similar items in EconPapers)
JEL-codes: D82 H26 K42 (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cenwps:012010

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