Serving two masters: the role for tax practitioners
This thesis explores the extent to which tax practitioners can be involved in eliciting more truthful reporting from taxpayers. The proposed tax agency strategy consists of establishing standards and specifying practitioners' responsibilities concerning their investigation of taxpayers' financial affairs. The enforcement mechanism is operationalized by having the tax agency strategically choose a new policy variable, the required level of practitioner investigation. A game-theoretic model is used to study the effects of this policy on taxpayers' hiring, communication, and reporting decisions, and on the tax agency's expected tax revenue.
A major characteristic of the model is that taxpayers' compliance strategies involve a trade-off between their desire to engage in tax evasion and minimization. This thesis distinguishes between these two activities and the differential costs associated with them, and captures taxpayers' incentives to hire practitioners. Practitioners can help taxpayers minimize by resolving their uncertainty about their tax rate. However practitioners reduce taxpayers' incentives to evade by investigating the level of income communicated to them. An important feature is the modelling of the information asymmetry between the taxpayer and the practitioner. Despite the possibility that evasion may be discovered, taxpayers may still consult the practitioner, due to the offsetting gains from minimization and potential savings of the expected tax agency audit costs.
The analysis demonstrates that the tax agency can, under most circumstances, affect the equilibrium proportion of taxpayers who hire practitioners as well as those who lie about their level of income. The tax agency, therefore, chooses the optimal levels of evasion and minimization that determine its expected revenue.
In equilibrium, the level of evasion need not be zero. Eliminating evasion may not be desirable because the required level of practitioner investigation will affect the level of minimization. Also, the expected taxes, penalties, and interest charges collected from evaders must be greater than the expected cost of auditing taxpayers. Therefore, the tax agency must trade off the levels of evasion and minimization. The model thus implies that there exists an optimal shifting of the burden of tax enforcement to the private sector.