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Compatibility in Tax Reporting

Lipatov, Vilen (2006): Compatibility in Tax Reporting.

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We consider corporate tax evasion when business partners have different attitudes towards aggressive tax accounting. There are costs of uncoordinated tax reports, both in terms of catching inspectors´ attention and running accounts. If these costs are small, there exist a unique stable Nash equilibrium of the game between the tax authority and a population of heterogeneous firms. In this equilibrium, the relation between compatibility costs and compliance is non-monotonic and depends on the curvature of auditing function. However, compatibility costs reduce non-compliance in low cheating regimes and may enhance it when many �firms are cheating. This provides one rationale for de veloping countries to be cautious with employing refined auditing schemes and for developed countries to promote complicated accounting procedures.

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