Optimal Performance Reward, Tax Compliance and Enforcement

27 Pages Posted: 26 Feb 2015

Date Written: February 24, 2015


This paper incorporates the incentives of tax inspectors into an equilibrium model of tax compliance and enforcement when the taxpayers' true income is private information (adverse selection) and the effort of tax inspectors to verify reported income is unobservable (moral hazard). It characterizes the optimal remuneration for tax inspectors, which is a function of discovered tax evasion, paying particular attention to the determinants of the power of incentives and the curvature of the optimal reward scheme. It is shown that the structure of the optimal reward is increasing, and in general non-linear, in the magnitude of discovered tax evasion. The equilibrium characterized has the features that: taxpayers with higher true income under report less and tax inspectors' auditing effort, and hence the probability of detecting tax non-compliance, decreases with reported income.

Suggested Citation

Kotsogiannis, Christos and Serfes, Konstantinos, Optimal Performance Reward, Tax Compliance and Enforcement (February 24, 2015). Available at SSRN: https://ssrn.com/abstract=2569383 or http://dx.doi.org/10.2139/ssrn.2569383

Christos Kotsogiannis

University of Exeter ( email )

Exeter EX4 4QX, Devon
United Kingdom

Konstantinos Serfes (Contact Author)

Drexel University ( email )

3220 Market Street
Philadelphia, PA 19104
United States
215-895-6816 (Phone)
215-571-4670 (Fax)

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