International Tax and Public Finance

, Volume 22, Issue 1, pp 120–143 | Cite as

Income tax buyouts and income tax evasion

  • Laszlo Goerke


A tax buyout is a contract between tax authorities and a tax payer which reduces the marginal income tax rate in exchange for a lump-sum payment. While previous contributions have focussed on labour supply, we consider the interaction with tax evasion and show that a buyout can increase expected tax revenues. This will be the case if (1) the audit probability is constant and the penalty for evasion is a function of undeclared income or (2) the penalty depends on the amount of taxes evaded, and authorities use information about income generated by the decision about a tax buyout offer when setting audit probabilities. Since individuals will only utilise a tax buyout if they are better off, higher tax revenues imply that such contracts can be Pareto improving.


Asymmetric information Revenues Self-selection  Tax buyouts  Tax evasion 

JEL Classification

D 82 H 21 H 24 H 26 


  1. Alesina, A., & Weil, P. (1992). Menus of linear income tax schedules, NBER Working Paper No. 3968.Google Scholar
  2. Allingham, M. G., & Sandmo, A. (1972). Income tax evasion: A theoretical analysis. Journal of Public Economics, 1(3–4), 323–338.CrossRefGoogle Scholar
  3. Bigio, S., & Zilberman, E. (2011). Optimal self-employment income tax enforcement. Journal of Public Economics, 95(9–10), 1021–1035.CrossRefGoogle Scholar
  4. Buehn, A., & Schneider, F. (2007). Shadow economies and corruption all over the world: Revised estimates for 120 countries. Economics: The Open-Access, Open-Assessment E-Journal, 1(9), 1–66.Google Scholar
  5. Carillo, P. E., Emran, M. S., & Rivadeneira, A. (2012). Do cheaters bunch together? Profit taxes, withholding rates and tax evasion. Retrieved April 30, 2013, from
  6. Chu, C. Y. C. (1990). Plea bargaining with the IRS. Journal of Public Economics, 41(3), 319–333.CrossRefGoogle Scholar
  7. Del Negro, M., Perri, F., & Schivardi, F. (2010). Tax buyouts. Journal of Monetary Economics, 57(5), 576–595.CrossRefGoogle Scholar
  8. Dharmapala, D., Slemrod, J., & Wilson, J. D. (2011). Tax policy and the missing middle: Optimal tax policy with firm-level administrative costs. Journal of Public Economics, 95(9–10), 1036–1047.CrossRefGoogle Scholar
  9. Falkinger, J., & Walther, H. (1991). Separating small and big fish: The case of income tax evasion. Journal of Economics, 54(1), 55–67.CrossRefGoogle Scholar
  10. Franzoni, L. A. (2009). Tax evasion and avoidance. In N. Garoupa (Ed.), Criminal law and economics (pp. 290–319). Cheltenham: Edward Elgar.Google Scholar
  11. Goerke, L. (2003). Tax evasion and tax progressivity. Public Finance Review, 31(2), 189–203.CrossRefGoogle Scholar
  12. HM Treasury. (2011). Reform of the taxation of non-domiciled individuals: A consultation. Retrieved April 30, 2013, from
  13. Keen, M., & Mintz, J. (2004). The optimal threshold for the value-added tax. Journal of Public Economics, 88(3–4), 559–576.CrossRefGoogle Scholar
  14. Koskela, E. (1983a). A note on progression, penalty schemes and tax evasion. Journal of Public Economics, 22(1), 127–133.CrossRefGoogle Scholar
  15. Koskela, E. (1983b). On the shape of tax schedule, the probability of detection, and the penalty schemes as deterrents to tax evasion. Public Finance/ Finances Publiques, 38(1), 70–80.Google Scholar
  16. OECD. (2009). Tax administration in OECD and selected non-OECD countries: Comparative information series (2008). Paris: Centre for Tax Policy and Administration.Google Scholar
  17. OECD. (2011). OECD economic surveys: Switzerland. Paris: OECD Publishing.Google Scholar
  18. Pencavel, J. H. (1979). A note on income tax evasion, labor supply, and nonlinear tax schedules. Journal of Public Economics, 12(1), 115–124.CrossRefGoogle Scholar
  19. Reinganum, J. F., & Wilde, L. L. (1985). Income tax compliance in a principal-agent framework. Journal of Public Economics, 26(1), 1–18.CrossRefGoogle Scholar
  20. Sleet, C. (2010). Discussion of “Tax Buyouts” by M. Del Negro, F. Perri and F. Schivardi. Journal of Monetary Economics, 57(5), 596–599.CrossRefGoogle Scholar
  21. Slemrod, J., & Yitzhaki, S. (2002). Tax avoidance, evasion, and administration. In A. Auerbach & M. Feldstein (Eds.), Handbook of public economics (Vol. 3, pp. 1423–1470). Amsterdam: Elsevier Science.Google Scholar
  22. Tonin, M. (2013). Too low to be true: The use of minimum thresholds to fight tax evasion. In C. Fuest & G. R. Zodrow (Eds.), Critical issues in taxation and development (pp. 167–188). Cambridge, MA: MIT Press.Google Scholar
  23. Ueng, K. L. G., & Yang, C. C. (2001). Plea bargaining with the IRS: Extensions and further results. Journal of Public Economics, 81(1), 83–98.Google Scholar
  24. Yitzhaki, S. (1974). A note on income tax evasion: A theoretical analysis. Journal of Public Economics, 3(2), 201–202.CrossRefGoogle Scholar
  25. Yitzhaki, S. (1987). On the excess burden of tax evasion. Public Finance Quarterly, 15(2), 123–137.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media New York 2014

Authors and Affiliations

  1. 1.Institute for Labour Law and Industrial Relations in the European Union (IAAEU)University of TrierTrierGermany
  2. 2.IZABonnGermany
  3. 3.CESifoMunichGermany

Personalised recommendations