Munich Personal RePEc Archive

Imperfect Detection of Tax Evasion in a Corrupt Tax Administration

Escobari, Diego (2011): Imperfect Detection of Tax Evasion in a Corrupt Tax Administration. Forthcoming in: Public Organization Review

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Abstract

This article models the imperfect detection of tax evasion motivated by the existence of a corrupt tax administration. Consistent with previous literature, fines and audit probabilities both have a positive effect on compliance. Moreover, the model shows that they have a negative effect on the bribes paid to corrupt tax officials. More corruption decreases compliance levels, giving honest auditors incentives to work harder to detect evasion. Giving inspectors a share of the detected evasion (tax farming) makes auditors work harder; however, increasing their wages reduces their exerted effort to discover evasion. Higher compliance can as well be achieved by hiring more efficient inspectors.

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