Income Tax Buyouts and Income Tax Evasion
35 Pages Posted: 20 Feb 2014
Date Written: January 31, 2014
A tax buyout is a contract between tax authorities and a tax payer which reduces the marginal income tax rate in exchange for a lump-sum payment. While previous contributions have focussed on labour supply, we consider the interaction with tax evasion and show that a buyout can increase expected tax revenues. This will be the case if (1) the audit probability is constant and the penalty for evasion is a function of undeclared income or (2) the penalty depends on the amount of taxes evaded, and authorities use information about income generated by the decision about a tax buyout offer when setting audit probabilities. Since individuals will only utilise a tax buyout if they are better off, higher tax revenues imply that such contracts can be Pareto-improving.
Keywords: asymmetric information, revenues, self-selection, tax buyouts, tax evasion
JEL Classification: D820, H210, H240, H260
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