Sales tax evasion: The case of monopolists

Sato, Hideki (2025): Sales tax evasion: The case of monopolists.

Abstract

This study addresses the following two questions focusing on state sales tax and the behavior of a monopolist: (1) Under what conditions would a monopolist evade state sales tax even if evasion is costly? and (2) Can tax rates and enforcement be effective deterrents against evasion? The analysis reveals that, under certain conditions, a monopolist facing enforcement may underreport sales rather than not report them at all, even if evasion incurs costs. Furthermore, this study demonstrates that reducing tax rates and strengthening enforcement can effectively prevent tax evasion and that such preventive measures can lead to increased tax revenue.

• Item Type: MPRA Paper
• Language: English
• Keywords: Sales tax, Monopolist, Tax evasion, Tax enforcement.
• Subjects: D - Microeconomics > D4 - Market Structure, Pricing, and Design > D42 - Monopoly; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H26 - Tax Evasion and Avoidance; H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents > H32 - Firm; H - Public Economics > H7 - State and Local Government ; Intergovernmental Relations > H71 - State and Local Taxation, Subsidies, and Revenue

References

Buccella, D., Fanti, L., & Gori, L. (2024). Environmental Policies in a Polluting Duopoly: A Simple Comparison, Italian Economic Journal, Open access.

Cremer, H., & Gahvari, F.(1993). Tax Evasion and Optimal Commodity Taxation, Journal of Public Economics, 50(2),261-275.

Federal Tax Administration (2023). State Sales Taxes–Food and Drug Exemptions, https://taxadmin.org/state-sales-taxes-food-and-drug-exemptions/

Marrelli, M. (1986). On Indirect Tax Evasion, Journal of Public Economics, 25(1-2), 181-196.

Wang, L F.S., & Conant, J.L. (1988). Corporate Tax Evasion and Output Decisions of the Uncertain Monopolist, National Tax Journal,41(4),579-581.