Auditing with Signals

This paper is a first step in analysing the use of statistical information about taxpayers' incomes by tax audit authorities. In a very simple model, we consider the design of the audit strategy when the tax authority can commit to it and has free access to a signal correlated with the taxpayer...

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Bibliographic Details
Published in:Economica (London) 2002-02, Vol.69 (273), p.1-20
Main Authors: Macho-Stadler, Inés, Pérez-Castrillo, J. David
Format: Article
Language:English
Subjects:
Auditing
Auditing policies
Correlation
Economic models
Economics
Financial budgets
Income
Income tax
Income taxes
Optimal taxation
Progressive taxation
Regressive taxation
Statistical analysis
Statistics
Studies
Tax audits
Tax evasion
Tax liabilities
Taxpayers
Taxpaying
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Summary:This paper is a first step in analysing the use of statistical information about taxpayers' incomes by tax audit authorities. In a very simple model, we consider the design of the audit strategy when the tax authority can commit to it and has free access to a signal correlated with the taxpayer's true income. We discuss the optimal enforcement policy and compare it with the optimal one when only self-reported income is considered. Our main result postulates that the well-known regressive bias of revenue-maximizing audit rules may be reversed into a progressive one when signals are used.
ISSN:0013-0427
1468-0335
DOI:10.1111/1468-0335.00268