Tax Enforcement with Differentiated Evasion Abilities

Taxpayers differ in ability to evade tax, and the likelihood of getting caught for cheating may depend on such ability. By assuming that the tax collection agency can classify taxpayers into different audit classes on the basis of a parameter which represents evasion ability, I derive the revenue-maximizing audit rates for these audit classes. I show that, other things being equal, audit classes with intermediate evasion abilities should be audited more frequently than those with either very high or very low abilities. Nevertheless, under such policies, compliance level is higher in audit classes with lower evasion abilities