On tax evaders and corrupt auditors

This paper takes cognizance of existence of bribery-type corruption in the tax system. The study seeks to analyze the strategic interaction between a tax evader and a corrupt auditor within a given tax situation. An equilibrium bribe rule is derived for the situation where a tax evader comes face to face with a corruptible auditor. In our stylized model, situations are found where both parties adopting the agreed bribe rule, benefit from cheating the system In addition, the existence of an equilibrium point is established in a two-person fixed threat Nash bargaining situation. A comparative static exercise brings out some intuitively appealing findings. Lastly, when the probability of a super audit is internalized within the system, besides other results, we find that, in a bribe situation, the effect of neither the increase in penalty rate for evasion nor the vigilance over the activities of a tax auditor on their behavior is straightforward. Rather they are ambiguous or at best situation specific. From the policy point of view, we find that if the government is successful in keeping the value of the expected probability of super audit above some value qo, bribery will vanish from the system. The age old method of the carrot and stick policy to obtain a desirable state also gets established in our setting. Bribery can be made unprofitable by adopting an appropriate carrot and stick policy towards the corruptible auditors.