Avoiding tax avoidance: A (repeated) game-theoretic approach
Abstract We propose an optimal auditing scheme for the tax authorities who face a given tax and penalty functions and a given budget constraint. Under our proposed strategy individuals can be classified into one of three groups. Each group is characterized by two parameters: (i) the probability of being audited in that group, and (ii) into which group will an individual move if: (ii.a) he reported truthfully, (ii.b) he cheated. It is then shown that there is a choice of these parameters so that in equilibrium (i.e., when every individual maximizes his payoff given the auditing strategy), the percentage of individuals that cheat is arbitrarily small.