Riccardo Martina

Tax evasion and strategic behaviour of the firms

Abstract The purpose of this paper is to analyze the optimal tax evasion decision in the context of an oligopolistic market with quantity setting firms. It is shown that the optimal amount of tax evasion for each firm depends not only on the degree of collusion in the market but also on the relative market shares of the firms; increasing collusion, however, leads to a larger amount of tax evasion in the market. It is proved that, with constant probability of detection, separability between shifting and evasion decisions holds, whereas it might fail to hold if the probability of detection is a function of the declared tax base. In this case, a probability function which decreases with the declared tax base will lead to lower evasion and lower shifting.

Tax evasion and corruption: endogenous deterrence and the perverse effects of fines

We consider a simple economy where self interested taxpayers have incentives to evade taxes and to escape sanctions by bribing public officials in charge of tax collection. However, tax collectors may be monitored by second-level inspectors whose incentives to exert detection activity are endogenously determined. In this framework, it is shown that the effects of classical deterrence instruments, such as fines, may be perverse; in particular, larger fines for corruption directly reduce corruption and indirectly reduce incentives to monitor it determining, as an overall effect, an increase in the underlying offence, that is tax evasion. Nevertheless, on the normative side, we show that, even if the Government cannot commit to a given level of deterrence, the maximal fine principle still holds.