Corruption, Harassment and Evasion in Tax Collection

The phenomenon of tax evasion is a universal problem especially prevalent in transition economies. What is the compliance/evasion decision of the taxpayers in presence of corruptible inspector and revenue maximizing government? How does a corrupt regime affect the task of tax collection? What is the optimal audit scheme for the government? This paper studies the strategic interaction between taxpayer and inspector in a sequential game theoretic framework and finds that despite inspection there can be suboptimal collection of taxes in a corrupt regime because of harassment, bribery and the possibility of collusion between the inspector and the taxpayer. In a corrupt regime the cost of corruption has a regressive bias. Also, it is interesting to note that under such a setup the proportional evasion performed by the poorer section is more than that of the richer section.