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Audits or Distortions: The Optimal Scheme to Enforce Self‐Employment Income Taxes
Author(s) -
ZILBERMAN EDUARDO
Publication year - 2016
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/jpet.12193
Subject(s) - audit , revenue , evasion (ethics) , microeconomics , economics , agency (philosophy) , distribution (mathematics) , tax deferral , scheme (mathematics) , econometrics , labour economics , accounting , public economics , tax reform , state income tax , gross income , mathematics , mathematical analysis , philosophy , immune system , epistemology , immunology , biology
I investigate the optimal auditing scheme for a revenue‐maximizing tax collection agency that observes not only reported profits, but also a single factor of production at each firm. Each firm is owned by a single entrepreneur whose managerial ability is random. The optimal auditing scheme is discontinuous and nonmonotone in ability. In intermediate audit costs, less productive entrepreneurs face auditing probabilities that increase in ability, whereas the ablest ones are not audited. Finally, the effective tax rate is higher in the middle of the managerial ability distribution; thus, the overall regressive (or progressive) bias that arises from evasion is unknown.