Corruption and Tax Evasion with Competitive Bribes

Abstract

In this paper we consider a simple economy where self interested taxpayers may have incentives to evade taxes and to escape sanctions, by bribing public officials in charge for tax collection. The level of monitoring and the level of corruption are endogenously determined assuming that the price for corruption (bribe) sets at a value where expected rents in the public sector are completely dissipated in monitoring costs due to competition among public officials. In the proposed framework, larger fines for evasion will increase tax compliance with ambiguous effects on corruption while larger fine for corruption reduce corruption at the cost of reducing tax compliance. Interestingly, a utilitarian legislator will want to set maximal penalties. Intuitively, preventing corruption through fines is valuable to the planner since it reduces the amount of rent dissipation in the public sector at the cost of decreasing deterrence for the underlying offence (evasion). Finally the shadow value of deterrence is such that the level of public good provided in the economy is smaller than its first best.