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Tax Evasion and Limited Liability
Author(s) -
UENG K. L. GLEN,
YANG C. C.
Publication year - 2006
Publication title -
journal of public economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.809
H-Index - 32
eISSN - 1467-9779
pISSN - 1097-3923
DOI - 10.1111/j.1467-9779.2006.00272.x
Subject(s) - bankruptcy , liability , evasion (ethics) , economics , tax evasion , context (archaeology) , deterrence (psychology) , deterrence theory , microeconomics , complement (music) , set (abstract data type) , pareto principle , law and economics , public economics , law , computer science , finance , operations management , paleontology , biochemistry , chemistry , programming language , immune system , complementation , political science , gene , immunology , biology , phenotype
Andreoni, Erard, and Feinstein (1998) suggest that imposing very high penalties for tax evasion is not possible under bankruptcy or limited liability constraints. In this paper, we complement their suggestion by showing that, in the presence of these constraints, imposing very high penalties can make an economy Pareto worse‐off. This result helps provide a further insight into why governments typically do not set very high penalties for tax evasion in practice. Implications for optimal deterrence policies in the context of tax evasion are also explored.