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Crime and Punishment in Taxation: Deceit, Deterrence, and the Self-Adjusting Penalty


Alex Raskolnikov


Columbia University - Law School


Columbia Law Review, April 2006
Columbia Law and Economics Working Paper No. 284

Abstract:     
Avoidance and evasion continue to frustrate the government's efforts to collect much needed tax revenues. This article articulates one of the reasons for this lack of success and proposes a new type of penalty that would strengthen tax enforcement while improving efficiency. The economic analysis of deterrence suggests that rational taxpayers choose among various avoidance or evasion strategies that are subject to identical statutory sanctions those that are more difficult for the government to find. I argue that many taxpayers do just that. Because probability of detection varies dramatically among different items on a tax return while nominal penalties do not take likelihood of detection into account, expected penalties for inconspicuous noncompliance are particularly low. Adjusting existing penalties will not solve the problem because what is (and is not) inconspicuous depends on a given tax return and, therefore, is not susceptible to the type of generalization on which the current penalties rely. I propose to complement the existing sanctions with a new penalty equal to a fraction of the legitimate subtraction item (such as a deduction, credit, or loss) reported on the same line of a return that contains the illegitimate one. With this penalty in place, the harder it is for the government to find a given avoidance transaction, the higher is the statutory sanction if the transaction is detected. The proposed penalty adjusts itself. As a result, the differences in expected penalties for many forms of avoidance and, to a lesser extent, evasion are reduced, the inefficient incentive to hide noncompliance is diminished, and the overall deterrence is improved.

Number of Pages in PDF File: 64

Keywords: Tax, penalties, deterrence

JEL Classification: H26, H21

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Date posted: October 21, 2005  

Suggested Citation

Raskolnikov, Alex, Crime and Punishment in Taxation: Deceit, Deterrence, and the Self-Adjusting Penalty. Columbia Law Review, April 2006; Columbia Law and Economics Working Paper No. 284. Available at SSRN: http://ssrn.com/abstract=823468

Contact Information

Alex Raskolnikov (Contact Author)
Columbia University - Law School ( email )
435 West 116th Street
New York, NY 10025
United States
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