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A Basic Model of Optimal Tax Enforcement under Liquidity Constraints

Author

Listed:
  • Alejandro Esteller-Moré

    (Universitat de Barcelona & IEB)

Abstract

I design a basic model based on the role of the tax administration as a lender of last resort (Andreoni 1992). If the administration's sole concern is for tax revenues, then it is optimal for it to make taxpayers take an unfair gamble. However, if it also gives some weight to the taxpayers' welfare in its objective function and this is sufficiently large, the situation might be reversed so that the auditing probability is lower and the evasion rate is higher. Under decreasing absolute risk aversion preferences, optimal enforcement is counter-cyclical (that is, greater liquidity constraints imply a higher level of enforcement) unless the administration attaches a considerable amount of weight to taxpayers' utility, which – at least in “normal times†– seems implausible. These theoretical results are complemented with numerical simulations.

Suggested Citation

  • Alejandro Esteller-Moré, 2020. "A Basic Model of Optimal Tax Enforcement under Liquidity Constraints," Economics Bulletin, AccessEcon, vol. 40(2), pages 1707-1713.
    • Handle: RePEc:ebl:ecbull:eb-20-00426
    as

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    References listed on IDEAS

    as
    1. L. Eeckhoudt & C. Gollier & H. Schlesinger, 2005. "Economic and financial decisions under risk," Post-Print hal-00325882, HAL.
    2. Andreoni, James, 1992. "IRS as loan shark tax compliance with borrowing constraints," Journal of Public Economics, Elsevier, vol. 49(1), pages 35-46, October.
    3. Niepelt, Dirk, 2005. "Timing tax evasion," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1611-1637, September.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    tax compliance; tax enforcement; liquidity constraints;
    All these keywords.

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents

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