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Tax evasion, corruption, and the remuneration of heterogeneous inspectors, Volume 1
 
Author:Wane, Waly; Collection Title:Policy, Research working paper ; no. WPS 2394
Date Stored:2000/08/26Document Date:2000/07/31
Document Type:Policy Research Working PaperSubTopics:Environmental Economics & Policies; Economic Theory & Research; Banks & Banking Reform; Poverty Impact Evaluation; Business Environment
Language:EnglishMajor Sector:Public Administration, Law, and Justice
Report Number:WPS2394Sub Sectors:Public Financial Management
Volume No:1  

Summary: The author develops a general model for addressing the question of how to compensate tax inspectors in an economy where corruption is pervasive - a model that considers the existence of strategic transmission of information. Most of the literature on corruption assumes that the taxpayer and the tax inspector jointly decide on the income to report, which also determines the size of the bribe. In contrast, this model considers the more realistic case in which the taxpayer unilaterally chooses the income to report. The tax inspector cannot change the report and is faced with a binary choice: either he negotiates the bribe on the basis of the income report or he denounces the tax evader and therefore renounces the bribe. In his model, the optimal compensation scheme must take into account the strategic interaction between taxpayers and tax inspectors: a) Pure "tax farming" (paying tax inspectors a share of their tax collections) is optimal only when all tax inspectors are corruptible. b) When there are both honest and corruptible inspectors, the optimal compensation scheme lies between pure tax farming and a pure wage scheme. c) Paradoxically, when inspectors are hired beforehand, it may be optimal to offer contracts that attract corruptible inspectors but not honest ones.

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