Income tax evasion and bribe chains

Abstract

Bribe chains arise when a hierarchy of corruptible auditors audits taxpayers. We investigate fine and reward structures for breaking bribe chains and establishing income revealing equilibria. We show that no super auditing is necessary in one off audits if auditors' rewards are related to the amount of tax evasion detected by them. However, such equilibria do not survive repeated encounters, even with super audits. We then show that if rewards are based on tax collection, income revealing equilibria can be sustained over repeated encounters. In such structures, the number of levels in the hierarchy is immaterial for income revelation as such, but it determines the net revenue of the government.