Abstract

http://ssrn.com/abstract=1548457
 


 



A Theoretical Analysis of Income Tax Evasion, Optimal Auditing, and Credibility in Developing Countries


Amitrajeet A. Batabyal


Rochester Institute of Technology

Hamid Beladi


University of Texas at San Antonio - College of Business - Department of Economics

February 5, 2010

Journal of Theoretical Politics, Vol. 22, No. 1, pp. 123-133, 2010

Abstract:     
We first construct a theoretical model of tax evasion in a stylized developing country in which all taxpayers have either high or low income. The key problem is that the high income taxpayers may underreport their income. An individual income tax return can only be verified with an audit that costs c. There is a constant tax rate τ on income and a fine F on underpaid tax. In this setting, we analyze two cases. In the first case, the tax authority pre-commits to its audit policy. We determine the optimal audit policy for the tax authority and then we discuss why this policy is not credible. In the second case, there is a fixed proportion of high income taxpayers who report their income truthfully. In this context, we first study the properties of a credible audit policy. Then, we examine the impact of an increase in the three parameters (c, τ, F) on the equilibrium audit policy.

Keywords: Credibility, Fine, Game, Income Tax Evasion, Optimal Auditing

JEL Classification: H29, O12, D82

Accepted Paper Series


Not Available For Download

Date posted: February 6, 2010  

Suggested Citation

Batabyal, Amitrajeet A. and Beladi, Hamid, A Theoretical Analysis of Income Tax Evasion, Optimal Auditing, and Credibility in Developing Countries (February 5, 2010). Journal of Theoretical Politics, Vol. 22, No. 1, pp. 123-133, 2010. Available at SSRN: http://ssrn.com/abstract=1548457

Contact Information

Amitrajeet A. Batabyal (Contact Author)
Rochester Institute of Technology ( email )
92 Lomb Memorial Drive
Rochester, NY 14623-5604
United States
585-475-2805 (Phone)
585-475-5777 (Fax)
HOME PAGE: http://www.rit.edu/~aabgsh/
Hamid Beladi
University of Texas at San Antonio - College of Business - Department of Economics ( email )
6900 North Loop 1604 West
P.O. Box 5636
San Antonio, TX 78249
United States
210-458-7038 (Phone)
210-458-7040 (Fax)
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