Wages as Anti-Corruption Strategy: A Note

Transcription

1 DISCUSSION PAPER November 200 No. 46 Wages as Ant-Corrupton Strategy: A Note by dek SAO Faculty of Economcs, Kyushu-Sangyo Unversty

2 Wages as ant-corrupton strategy: A Note dek Sato Kyushu-Sangyo Unversty Abstract hs note s concerned wth a commtment towards ncentve wages to tax audtors as ant-corrupton strategy. We shall clarfy a scheme that pays allowances tax audtors so that they do not tempted to take brbes s not socally desrable Keywords: Ant-Corrupton, Wages, ax evason

3 . Introducton For example, the Vetnam government has a scheme n place that pays allowances publc servants so that they do not tempted to take brbes. Is ths strategy desrable to socety? he subject of ths note s corrupt practces n tax admnstraton. In research on corrupton n tax admnstraton, wth respect to whch Vrman (987) provded a poneerng work, the latest research s the three-ter structure model artculated by Sngh (2008). On the other hand, Sosa (2004) provded a formal model of wage-corrupton tradeoff usng expected-utlty model. In ths paper, I wll shed lght on the socal desrablty of ncentve wages to tax audtors usng three-ter structure model. In ths note, regardng the corruptblty of tax audtors, two cases are consdered: Cases where tax audtors adhere to servce regulatons (no-colluson) and cases where tax audtors are complct wth taxpayers (colluson). Concernng the latter, the followng two cases are consdered: Cases where the government does not prevent complcty among tax audtors and taxpayers (colluson-free) and cases where the government prevents complcty by payng ncentves to tax audtors (colluson-proof). In the next Secton, I establsh the basc model and compare the economc welfare by ntroducng the optmal taxaton structure wth respect to no-colluson (Secton 3), colluson-free (Secton 4) and colluson-proof (Secton 5). astly, I menton the polcy mplcatons. 2

4 2. Model A three-ter structure composed of the government, tax audtors and taxpayers s consdered. he true ncome level of taxpayers s ether I or I,where 0 I I. Subseuently, I ( I ) s called ype (). he probablty densty of ype s 0,,,,where. he ype represents nformaton that s observable by tax audtors. axpayers pay ncome tax n accordance wth the ncome level they declared, where 0 I,, and 0. (Because a fraudulent declaraton by ype s rratonal) ax audtors effect a tax examnaton wth respect to low ncome declarers at probablty p and exact penalty F aganst fraudulent declarers. axpayers approprate ther dsposable ncome to one knd of prvate consumpton, wth ype prvate consumpton as x. o ntroduce the optmal taxaton structure, the utlty functon s assumed as follows. u () log x he government must fnance a constant level of spendng R wth ncome tax. he purpose of the government s to establsh a taxaton structure that maxmzes utltaran economc welfare as follows. log W log I I (2) 3

5 3. No-colluson case Regardng ncentve compatblty, ype s presented n the followng formula. I p I F p I log log log (3) he left sde s the utlty level when ype taxpayers fle approprate declaratons. he rght s the expected utlty level when ype taxpayers, faced wth montorng rsk probablty p, fle fraudulent declaratons. A soluton of p n the formula above results n the followng. log p log I log I I log I F (4) Snce the rght sde s postve, p s set at the lower bound value of p and calculatng ts relaton to F results n the followng. log I log I 2 log p / F 0 (5) log I I F I F In other words, p s the decreasng functon of F. herefore, when F, p. When ths occurs, defnng I I I would result n the followng proposton. 4

6 Proposton For a no-colluson, the optmal ncome tax s the followng. R I c ; R I c Because an economc welfare s NC log at eulbrum, f R c I I W I I R c (6) NC, then W 0. 4 Colluson-free case From Proposton, the amount of tax evason s regardng I. hen, I, the exstence of cases where brbery s commonplace. ere, regardng the pe of brbery called I, the proporton of brbery ( ) s customarly gven. And, f exogenously gvng penalty ( ) for brbes, then I (7) thus creatng brbery. When ths occurs, the ype utlty level s the followng. u log I I (8) Concernng addtonal burden of ype, I (9) forms, therefore, as long as the government consders the transfer rate of brbery as 5

7 mpossble to verfy, economc welfare ncreases at eulbrum. owever, the government fals to fnance R. 5 Colluson-proof case When formula (7) forms, theoretcally, corrupt practces can be prevented merely by havng the government gve remuneratons to tax audtors only n the order of s I. When the government attempts to fnance tax revenue to match R, the followng proposton s formed: Proposton 2 For a colluson-proof case, the optmal ncome tax s the followng. R I c s ; R I c s In the table below, the optmal taxaton structure s summarzed n chart form, where and I I I R. No-colluson Colluson-free Colluson-proof R I c R I c R I c s R I c R I c R I c s I I I From Proposton 2, economc welfare s the followng. W log I I R c s (0) Clearly, the followng proposton s formed. 6

8 Proposton 3 W NC W 6. Concluson In ths note, usng the three-ter model, I ntroduced the optmal taxaton structure and compared the resultng economc welfare under t wth the economc welfare resultng from each of the no-colluson, colluson-free and colluson-proof. Because t became clear that the colluson-proof case engenders the worst crcumstances, I state the governmental mplcatons of ths paper as follows: when an ant-corrupton scheme s formulated, namely regardng a commtment towards ncentve wages to publc servants, then cauton should be taken from the perspectve of economc welfare. 7

9 References Sngh,K.J., On ax Evaders and Corrupt Audtors, he Journal of Internatonal rade & Economc Development, 7-(2008): Sosa,.A., Wages and Other Determnants of Corrupton, Revew of Development Economcs, 8-4(2004): Vrman, A. ax Evason, Corrupton and Admnstraton: Montorng the People s Agent under Symmetrc Dshonesty. Dscusson Paper 27, Development Research Dvson, he World Bank, (987). 8

10 Appendx :Proof of Proposton When F, the audtng cost s c, therefore, the optmal ncome tax s the soluton of the followng problem. Max W, st.. R c Replacng the constrant wth R c and substtutng t for the objectve functon to fnd the frst-order condton for followng. results n the 0 Rc I I Consderng 0, a soluton of n the above formula would result n the followng. R I c Replacng ths result for the constrant would gve the followng. R I c (Q.E.D.) 9

11 0 Appendx 2: Proof of Proposton 2 he government s problem s as follows. s c R s t MaxW.., Because replacng the constrant wth c s R and substtutng t for the objectve functon to obtan the frst-order condton for results n 0, then 0 I R c s I A soluton of would result n the followng. s c I R Substtutng ths result for the constrant results n the followng. s c I R (Q.E.D.)