Corruption, extortion and evasion*
Paper number: 98/09
Paper date: First version: July 1996 This version: September 1998
Paper Category: Discussion Paper
University of Exeter
University of Essex
International Monetary Fund Washington DC
Institute for Fiscal Studies London
Corruption, evasion and the abuse of power (and the possibility thereof) are pervasive features of economic activity. A prominent instance is tax collection. This paper examines the implications of corruptibility and the potential abuse of authority for the effects and optimal design of (potentially non-linear) tax collection schemes. Amongst the findings are that: the distributional effects of evasion and corruption are unambiguously regressive under the kinds of schemes usual in practice; and collecting progressive taxes without inducing evasion or corruption may require that inspectors be paid commission on high income reports (but not on low), with the cost of this potentially creating what seems to be a previously-unnoticed trade-off between equity and efficiency.
JEL Classification Nos: D73; D82; H26
Keywords: Corruption; mechanism design
Corresponding Author: Jean Hindriks, Department of Economics, University of Exeter, Streatham Court, Rennes Drive, Exeter, EX4 4PU, UK, tel: (44) 1392 263237, fax: (44) 1392 263242, email: Jean.Hindriks@exeter.ac.uk
*Financial support from the European Commission both under contract ERBFMBICT971968 and for research network on Fiscal Implication of European Integration, is acknowledged with thanks. We also greatly appreciate helpful comments from participants in seminars at Bristol, Istanbul, Kyoto, Leicester, the LSE, Maastricht, Memorial and Warwick, and from Tim Besley, Nicolas Marceau, Steve Coate and the referees. Errors and views are ours alone, not necessarily those of any institution with which we are affiliated.