Working Paper: NBER ID: w10690
Authors: Keith J. Crocker; Joel Slemrod
Abstract: This paper examines corporate tax evasion in the context of the contractual relationship between the shareholders of a firm and a tax manager who possesses private information regarding the extent of legally permissible reductions in taxable income, and who may also undertake illegal tax evasion. Using a costly state falsification framework, we characterize formally the optimal incentive compensation contract for the tax manager and, in particular, how the form of that contract changes in response to alternative enforcement policies imposed by the taxing authority. The optimal contract may adjust to offset, at least partially, the effect of sanctions against illegal evasion, and we find a new and policy-relevant non-equivalence result: penalties imposed on the tax manager are more effective in reducing evasion than are those imposed on shareholders.
Keywords: Corporate Tax Evasion; Agency Costs; Incentive Compensation
JEL Codes: H25; H26; D82
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| penalties imposed directly on the tax manager (CFO) (M12) | reduction in corporate tax evasion (H26) |
| enforcement policy (G18) | optimal compensation contract for the CFO (M12) |
| optimal compensation contract for the CFO (M12) | tax evasion behavior (H26) |
| enforcement policy (G18) | tax evasion behavior (H26) |