Tax Evasion and Coordination

We consider corporate tax evasion as a decision affecting business partners. There are costs of uncoordinated tax reports, both in terms of catching inspectors' attention and running accounts. If these costs are small, there exist a unique Nash equilibrium of the game between the tax authority and a population of heterogenous firms. In this equilibrium, the miscoordination costs enhance non-compliance if and only if more than 50% of the firms are cheating. This provides one rationale for developing countries to be cautious with employing refined auditing schemes and for developed countries to promote complicated accounting procedures.