Corporate Tax Evasion with Agency Costs

30 Pages Posted: 9 Sep 2004 Last revised: 18 Sep 2010

See all articles by Keith J. Crocker

Keith J. Crocker

Penn State University - Smeal College of Business

Joel B. Slemrod

University of Michigan, Stephen M. Ross School of Business; National Bureau of Economic Research (NBER)

Date Written: August 2004

Abstract

This paper examines corporate tax evasion in the context of the contractual relationship between the shareholders of a firm and a tax manager who possesses private information regarding the extent of legally permissible reductions in taxable income, and who may also undertake illegal tax evasion. Using a costly state falsification framework, we characterize formally the optimal incentive compensation contract for the tax manager and, in particular, how the form of that contract changes in response to alternative enforcement policies imposed by the taxing authority. The optimal contract may adjust to offset, at least partially, the effect of sanctions against illegal evasion, and we find a new and policy-relevant non-equivalence result: penalties imposed on the tax manager are more effective in reducing evasion than are those imposed on shareholders.

Suggested Citation

Crocker, Keith J. and Slemrod, Joel B., Corporate Tax Evasion with Agency Costs (August 2004). NBER Working Paper No. w10690. Available at SSRN: https://ssrn.com/abstract=579221

Keith J. Crocker

Penn State University - Smeal College of Business ( email )

University Park, PA 16802
United States
814-863-0664 (Phone)
814-863-0664 (Fax)

Joel B. Slemrod (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Room R5396
Ann Arbor, MI 48109-1234
United States
734-936-3914 (Phone)
734-763-4032 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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