Optimal tax enforcement under prospect theory

• Amedeo Piolatto ^[1] ; Gwenola Trotin ^[2]
  1. [1] Universitat de Barcelona

     Universitat de Barcelona

     Barcelona, España

     
  2. [2] Charles de Gaulle University Lille III

     Charles de Gaulle University Lille III

     Arrondissement de Lille, Francia

     
• Localización: Working papers = Documentos de trabajo: Serie AD, Nº. 24, 2011, págs. 1-14
• Idioma: inglés
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• Resumen

  • Prospect Theory (PT) has become the most credited alternative to Expected Utility Theory (EUT) as a theory of decision under uncertainty. This paper characterizes the optimal income tax and audit schemes under tax evasion, when taxpayers behave as predicted by PT. We show that the standard EUT results keep holding under PT, under even weaker conditions. Under fair assumptions on the reference income and on the utility function of taxpayers, we show that the optimal audit probability function is non-increasing and the optimal tax function is nondecreasing and concave.