Some issues related to tax collection

Abstract

newlineTax revenue constitutes a major source of government revenue. Tax collection is a newlineprocess in which the individuals/agents themselves have to declare their true income newlineand file tax returns. Thus, individuals/agents can try to conceal their true income newlineby indulging in activities such as undervaluation of true income and tax evasion. newlineRandom auditing is performed by tax authorities to counter this phenomenon but newlineit is observed that sometimes the tax inspectors abuse their power(s) to harass or newlineextort taxpayers. The present work attempts to study the related issues both theoretically newlineas well as empirically. newline newlineWhat is the compliance/evasion decision of the taxpayers in presence of corruptible newlineinspector and revenue maximizing government? How does a potentially corruptible newlineofficer affect the task of tax collection? What is the optimal audit scheme for newlinethe government? We try to answer some of these queries by studying the strategic newlineinteraction between taxpayers and inspectors in a sequential game theoretic framework newlineand find that despite inspection there can be suboptimal collection of taxes newlinein a corrupt regime because of harassment, bribery and the possibility of collusion newlinebetween the inspector and the taxpayer. In a corrupt regime the cost of corruption newlinehas a regressive bias. It affects the relatively poor more than the rich. It is interesting newlineto note that under such a setup the proportional evasion performed by the newlinepoorer section is more than that of the richer section. Also, under such a framework newlineit is found that complete audit is a suboptimal strategy for the government to be newlineexercised. newline newlineFurther, using a panel of sixteen major states of India, we attempt to explain the newlinedeterminants of personal income tax revenue and study the behaviour of taxpayer newlinecompliance. It is found that factors such as, income and tax rate have a positive newlineinfluence on personal income tax revenue collection, whereas, returns filed per officer newline(workload) has a negative impact on revenue. It is found that the compliance effects newlineare certainly play