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On How to Keep Tax Payers Honest (or almost so)

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  • GEOFFREY FISHBURN

Abstract

One line of investigation in the problem of tax evasion has been introduced by B. Singh who studied the question of the ‘Optimum probability of detection’ which must be set (or be believed to be set) in order to induce the lax payer to declare income fully (‘complete honesty’). However, detection is costly and the achievement of an ‘optimum rate’ may therefore be ruled out on the grounds of economy. On the other hand, the penalty rate is set by legislative action, which is relatively costless. In contrast to Singh we take the probability of detection as given and study the ‘prohibitive penalty rate’, generally for any desired minimal level of evasion and more extensively where the desired evasion is zero. The formulae for the prohibitive rates are derived for each of three penalty functions, and the corresponding rates calculated for a selection of probabilities of detection on the basis of the current Australian taxation schedules. The calculations involved are simple and may be readily made for other countries.

Suggested Citation

  • Geoffrey Fishburn, 1979. "On How to Keep Tax Payers Honest (or almost so)," The Economic Record, The Economic Society of Australia, vol. 55(3), pages 267-270, September.
    • Handle: RePEc:bla:ecorec:v:55:y:1979:i:3:p:267-270
    DOI: 10.1111/j.1475-4932.1979.tb02229.x
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    References listed on IDEAS

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    1. Singh, Balbir, 1973. "Making honesty the best policy," Journal of Public Economics, Elsevier, vol. 2(3), pages 257-263, July.
    2. Murray C. Kemp & Yew‐Kwang Ng, 1979. "The Importance of Being Honest," The Economic Record, The Economic Society of Australia, vol. 55(1), pages 41-46, March.
    3. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 323-338, November.
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    Cited by:

    1. Reinganum, Jennifer F. & Wilde, Louis L., 1985. "Income tax compliance in a principal-agent framework," Journal of Public Economics, Elsevier, vol. 26(1), pages 1-18, February.
    2. J. C. Baldry, 1984. "The Enforcement of Income Tax Laws: Efficiency Implications," The Economic Record, The Economic Society of Australia, vol. 60(2), pages 156-159, June.
    3. J. A. Rickard & A. M. Russell & T. D. Howroyd, 1982. "A Tax Evasion Model with Allowance for Retroactive Penalties," The Economic Record, The Economic Society of Australia, vol. 58(4), pages 379-385, December.
    4. Iulia CAPRIAN & Iurie CAPRIAN, 2015. "Role Of Tax Penalties In Taxpayers Education," ECONOMY AND SOCIOLOGY: Theoretical and Scientifical Journal, Socionet;Complexul Editorial "INCE", issue 1, pages 78-84.
    5. Shlomo Yitzhaki, 1987. "On the Excess Burden of Tax Evasion," Public Finance Review, , vol. 15(2), pages 123-137, April.

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