Abstract
The purpose of this paper is to propose a new evasion-counteracting policy and to prove its welfare-improving property. The new FATOTA policy allows a target group of businesses to choose between the following two options: paying a Fixed Amount of Taxes, thus exempting themselves from tax audits, or paying only the amount they choose to pay and subject to possible Tax Audits. It is shown that FATOTA is very similar to the plea bargaining system of the U.S. criminal proceedings, and our results can be treated as an extension of the Grossman-Katz analysis to the crime of tax evasion.
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