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Abstract:

DARP Paper
Tax Compliance by Firms and Audit Policy
Ralph Bayer and Frank A Cowell
September 2010
Paper No' DARP 102:
Full Paper (pdf)

JEL Classification: H20, H21


Tags: tax compliance; evasion; oligopoly

Firms are usually better informed than tax authorities about market conditions and the potential profits of competitors. They may try to exploit this situation by underreporting their own taxable profits. The tax authority could offset firms’ informational advantage by adopting “smarter” audit policies .that take into account the relationship between a firm’s reported profits and reports for the industry as a whole. Such an audit policy will create an externality for the decision makers in the industry and this externality can be expected to affect not only firms’ reporting policies but also their market decisions. If public policy takes into account wider economic issues than just revenue raising what is the appropriate way for a tax authority to run such an audit policy? We develop some clear policy rules in a standard model of an industry and show the effect of these rules using simulations.ca3