International Tax and Public Finance

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

Income tax buyouts and income tax evasion

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Abstract

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.

Keywords

Asymmetric information Revenues Self-selection  Tax buyouts  Tax evasion 

JEL Classification

D 82 H 21 H 24 H 26 

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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

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