Income Tax Buyouts and Income Tax Evasion

35 Pages Posted: 20 Feb 2014

See all articles by Laszlo Goerke

Laszlo Goerke

University of Trier - Institute of Labour Law and Industrial Relations in the European Union; CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Date Written: January 31, 2014

Abstract

A tax buyout is a contract between tax authorities and a tax payer which reduces the marginal income tax rate in exchange for a lump-sum payment. While previous contributions have focussed on labour supply, we consider the interaction with tax evasion and show that a buyout can increase expected tax revenues. This will be the case if (1) the audit probability is constant and the penalty for evasion is a function of undeclared income or (2) the penalty depends on the amount of taxes evaded, and authorities use information about income generated by the decision about a tax buyout offer when setting audit probabilities. Since individuals will only utilise a tax buyout if they are better off, higher tax revenues imply that such contracts can be Pareto-improving.

Keywords: asymmetric information, revenues, self-selection, tax buyouts, tax evasion

JEL Classification: D820, H210, H240, H260

Suggested Citation

Goerke, Laszlo, Income Tax Buyouts and Income Tax Evasion (January 31, 2014). CESifo Working Paper Series No. 4613, Available at SSRN: https://ssrn.com/abstract=2398259

Laszlo Goerke (Contact Author)

University of Trier - Institute of Labour Law and Industrial Relations in the European Union ( email )

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