Tax evasion, tax reward and the optimal fiscal policy

Abstract

This theoretical paper studies the optimal fiscal policy in the presence of both pen- alties for tax evasion and rewards for tax compliance. Indeed, the presence of tax rewards changes the behaviour of firms and amplifies the role of the tax authority. In general, tax reward is able to reduce corporate tax evasion. However, the opti- mal fiscal policy depends on the fiscal scenario. Precisely, audit emerges as the main element of fiscal policy when tax evasion is widespread (negative scenario); whereas, in the positive fiscal scenario (where most people comply with tax rules), the range of fiscal policy choices is broader.