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Tax Evasion and Auditing in a Federal Economy

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  • Sven Stö
  • Christian Traxler

Abstract

This paper analyzes the relation between tax auditing and fiscal equalization in the context of fiscal competition. We incorporate a model of tax evasion by firms into a standard tax competition framework where regional governments use their audit rates as a strategic instrument to engage in fiscal competition. We compare the region’s choice of audit policies for three different cases: A scenario of unconfined competition without interregional transfers, a scenario with a gross revenue equalization (GRS) scheme and finally, a scenario with net revenue sharing (NRS), where not only the revenues from taxation but also the regions auditing costs are shared. Without regional transfers, fiscal competition leads to audit rates which are inefficiently low for revenue-maximizing governments. While in general GRS aggravates the inefficiency, NRS makes the decentralized choice of auditing policies more efficient. Copyright Springer Science + Business Media, Inc. 2005

Suggested Citation

  • Sven Stö & Christian Traxler, 2005. "Tax Evasion and Auditing in a Federal Economy," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 12(4), pages 515-531, August.
    • Handle: RePEc:kap:itaxpf:v:12:y:2005:i:4:p:515-531
    DOI: 10.1007/s10797-005-1542-0
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