Corruptibility and tax evasion

Roy Cerqueti,Raffaella Coppier

doi:10.1007/s10657-013-9406-z

Abstract

Reduction of fiscal evasion may be pursued by introducing incentive schemes for tax inspectors. The aim of this paper is to explain the role of such bonuses in an economic environment with corruption, i.e. in a world where entrepreneurs and tax inspectors are open to bribery. In detail, we analyze the role of a public incentive scheme, where the tax inspector’s bargaining strength is endogenous with respect to an incentive mechanism: indeed the knowledge that even if an entrepreneur does not agree to pay the bribe, s/he can report tax evasion and be partly rewarded for this, increases the tax inspector’s bargaining strength.

Highlights

Tax evasion and fiscal corruption have been a general and persistent problem throughout history with serious economic consequences even in countries with developed tax systems
We analyze the role of a public incentive scheme, considering that the tax inspector’s bargaining strength is endogenous with respect to an incentive mechanism
This work develops a theoretical model for analyzing the role of incentive schemes where there is fiscal corruption, i.e. in a world where tax inspectors are open to bribery

Summary

Introduction

Tax evasion and fiscal corruption have been a general and persistent problem throughout history with serious economic consequences even in countries with developed tax systems. There is an extensive literature investigating the origins, effects and extent of evasion and corruption from both theoretical and empirical points of view, interaction between tax evasion and corruption has only been partially explored. It is, only recently that this relationship has been investigated by the scientific community. When tax authorities are dealing with the possibility of corruption, they must

Theoretical model

The game: description and solution

The role of incentives in fighting evasion

Conclusions