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Optimal Auditing in a Dynamic Model of Tax Compliance
2010
Social Science Research Network
We study the optimal auditing of a taxpayer's income in a dynamic principalagent model of hidden income. Taxpayers in our model initially have low income and stochastically transit to high income that is an absorbing state. A low-income taxpayer who transits to high income can under-report his true income and evade his taxes. With a constant absolute risk-aversion utility function and a costly auditing technology, we show that the optimal auditing mechanism in our model consists of cycles.
doi:10.2139/ssrn.1620044
fatcat:2igmiyokhjh4nged3o2nx5rhmy