Deterrence and Tax Treatment of Monetary Sanctions and Litigation Costs

42 Pages Posted: 28 Jul 2005 Last revised: 1 Dec 2008

See all articles by Jacob Nussim

Jacob Nussim

Bar-Ilan University - Faculty of Law

Avraham D. Tabbach

Tel Aviv University

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

Nussim, Jacob and Tabbach, Avraham D., Deterrence and Tax Treatment of Monetary Sanctions and Litigation Costs (July 10, 2005). International Review of Law and Economics, Forthcoming; Bar Ilan University, Public Law and Legal Theory Working Paper No. 11-05. Available at SSRN:

Jacob Nussim (Contact Author)

Bar-Ilan University - Faculty of Law ( email )

Faculty of Law
Ramat Gan, 52900
972-3-531-7088 (Phone)
972-3-535-1856 (Fax)

Avraham D. Tabbach

Tel Aviv University ( email )

Ramat Aviv
Tel Aviv 69978, IL

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