Deterrence and Tax Treatment of Monetary Sanctions and Litigation Costs
42 Pages Posted: 28 Jul 2005 Last revised: 1 Dec 2008
Date Written: July 10, 2005
This paper explores the effects of alternative tax rules regarding monetary sanctions and litigation costs on the levels of criminal activity and litigation expenditure. The key insight is that taxation may affect crime not only by changing the relative expected returns from legal and criminal activity but also through its effect on litigation. The cross-effects of crime and litigation expenditures, that is, the fact that criminal activity and litigation expenditure may be complements, yield interesting, counter-intuitive results. For example, contrary to commonly held view, non-deductibility of monetary sanctions may increase the level of crime, if litigation expenses are deductible. In addition, if deductibility of legal expenses depends on a successful trial outcome, this may also increase amounts spent on litigation and time allocated to crime. As this paper shows, however, pure income tax, that is, income tax allowing deductions for monetary sanctions and litigation costs, maintains the pre-tax levels of crime and litigation expenditures for risk-neutral offenders. The paper further explores related policy implications.
Keywords: crime, litigation, optimal taxation, criminal enofrcement
JEL Classification: H21, H26, J22, K14, K34, K42
Suggested Citation: Suggested Citation