(Tax evasion) A household with income Y decides how much income to un- derreport (R). The household is taxed at rate t. The available income after reporting Y - R is Y - (Y – R) The government monitors households and can detect tax evasion with probability p. If the govern- ment finds the household misreported income, the available household income becomes Y(1- t) – P(R) Henceforth, the expected after-tax income of misreporting R is: (1- p) Y - t(Y – R)]+p[Y(1-t) – P(R)] i) What is the optimal amount of income misreported when Y 100, the tax rate t = 0.25, the probability that the government detects tax evasion is p 0.2, and the penalty if found evading is P(R) = ? ii) How would tax evasion change if the household is taxed at t = 0.4. Interpret the difference with your answer in i).

(Tax evasion) A household with income Y decides how much income to un- derreport (R). The household is taxed at rate t. The available income after reporting Y - R is Y - (Y – R) The government monitors households and can detect tax evasion with probability p. If the govern- ment finds the household misreported income, the available household income becomes Y(1- t) – P(R) Henceforth, the expected after-tax income of misreporting R is: (1- p) Y - t(Y – R)]+p[Y(1-t) – P(R)] i) What is the optimal amount of income misreported when Y 100, the tax rate t = 0.25, the probability that the government detects tax evasion is p 0.2, and the penalty if found evading is P(R) = ? ii) How would tax evasion change if the household is taxed at t = 0.4. Interpret the difference with your answer in i).

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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A5
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