Settlement in Tax Evasion Prosecution

Abstract

It is often argued that, even if optimal ex post, settlement dilutes deterrence ex ante. We analyse the interest for the tax authority of committing, ex ante, to a settlement strategy. We show that to commit to the use of settlements is ex ante optimal when the tax authority receives signals that provide statistical information about the taxpayers' true tax liability. The more informative the signal, the larger the additional expected revenue raised by the tax authority when using settlement as a policy tool.