Tax Compliance by Firms and Audit Policy

33 Pages Posted: 30 Nov 2010

See all articles by Ralph Bayer

Ralph Bayer

affiliation not provided to SSRN

Frank Cowell

London School of Economics & Political Science (LSE) - Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD)

Date Written: September 2010

Abstract

Firms are usually better informed than tax authorities about market conditions and the potential profits of competitors. They may try to exploit this situation by underreporting their own taxable profits. The tax authority could offset firms' informational advantage by adopting "smarter" audit policies that take into account the relationship between a firm's reported profits and reports for the industry as a whole. Such an audit policy will create an externality for the decision makers in the industry and this externality can be expected to affect not only firms' reporting policies but also their market decisions. If public policy takes into account wider economic issues than just revenue raising what is the appropriate way for a tax authority to run such an audit policy? We develop some clear policy rules in a standard model of an industry and show the effect of these rules using simulations.

JEL Classification: H20, H21

Suggested Citation

Bayer, Ralph and Cowell, Frank A., Tax Compliance by Firms and Audit Policy (September 2010). LSE STICERD Research Paper No. DARP102. Available at SSRN: https://ssrn.com/abstract=1717437

Ralph Bayer (Contact Author)

affiliation not provided to SSRN

No Address Available

Frank A. Cowell

London School of Economics & Political Science (LSE) - Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD) ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44 (0)171-955 7277 (Phone)
+44 (0)171-242 2357 (Fax)

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