Evading, auditing and taxing: The equity-compliance tradeoff

Summary

The research paper "Evading, auditing and taxing: The equity-compliance tradeoff" by Cremer, Marchand, and Pestieau, published in the *Journal of Public Economics* in 1990, delves into the complexities of tax evasion and its implications for public policy. The authors analyze these issues within a model of linear income taxation where taxpayers aim to minimize their expected tax payments, which include penalties for underreporting. The tax administration, in turn, is responsible for setting audit policies. A key aspect of their methodology involves examining how the optimal audit policy can be structured, particularly when a social custom exists that encourages honest taxpaying. The study also indicates that an optimal revenue-maximizing scheme can be characterized as an equilibrium outcome. A central theme of the paper is the identification and analysis of critical tradeoffs. The abstract highlights an "equity-compliance tradeoff" and further introduces an "equity-efficiency tradeoff," suggesting that the pursuit of one objective may come at the expense of another in the context of tax enforcement and design. The findings imply that achieving a high level of tax compliance could be effectively realized with a low probability of audit, provided that the associated penalties or measures are stringent [user provided abstract]. However, the paper also raises concerns regarding the equity implications of optimal enforcement strategies. It suggests that optimal enforcement policies may inherently introduce a regressive bias, potentially offering higher-income taxpayers greater opportunities to evade compared to their lower-income counterparts. The authors propose that alleviating this regressive bias might involve shaping audit policies according to indices correlated with true income and by suitably adjusting tax rates. Furthermore, the paper explicitly calls for future research to relax the assumption of taxpayer risk neutrality, acknowledging it as a crucial avenue for more comprehensive understanding. The work ultimately considers the implications of more general tax functions and audit mechanisms [user provided abstract].