Tax Evasion, Corruption, and the Remuneration of Heterogeneous Inspectors
The author develops a general model for addressing the question of how to compensate tax inspectors in an economy where corruption is pervasive - a model that considers the existence of strategic transmission of information. Most of the literature...
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Online Access: | http://documents.worldbank.org/curated/en/2000/07/443640/tax-evasion-corruption-remuneration-heterogeneous-inspectors http://hdl.handle.net/10986/19822 |
| Summary: | The author develops a general model for
addressing the question of how to compensate tax inspectors
in an economy where corruption is pervasive - a model that
considers the existence of strategic transmission of
information. Most of the literature on corruption assumes
that the taxpayer and the tax inspector jointly decide on
the income to report, which also determines the size of the
bribe. In contrast, this model considers the more realistic
case in which the taxpayer unilaterally chooses the income
to report. The tax inspector cannot change the report and is
faced with a binary choice: either he negotiates the bribe
on the basis of the income report or he denounces the tax
evader and therefore renounces the bribe. In his model, the
optimal compensation scheme must take into account the
strategic interaction between taxpayers and tax inspectors:
a) Pure "tax farming" (paying tax inspectors a
share of their tax collections) is optimal only when all tax
inspectors are corruptible. b) When there are both honest
and corruptible inspectors, the optimal compensation scheme
lies between pure tax farming and a pure wage scheme. c)
Paradoxically, when inspectors are hired beforehand, it may
be optimal to offer contracts that attract corruptible
inspectors but not honest ones. |
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