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A Theory of Auditing and Plunder

Border, Kim C. and Sobel, Joel (1985) A Theory of Auditing and Plunder. Social Science Working Paper, 573. California Institute of Technology , Pasadena, CA. (Unpublished)

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Taxpayers know their income but the IRS does not. The IRS can audit taxpayers to discover their true income, but auditing is costly. We characterize optimal policies for the IRS when it is free to choose tax levies, audit probabilities and penalties. The main results are that optimal policies involve taxes which are monotonically increasing in reported incomes and audit probabilities are monotonically decreasing in reported income. In general optimal schemes involve stochastic auditing of reports and rebates for telling the truth. A theory of optimal plundering is described.

Item Type:Report or Paper (Discussion Paper)
Border, Kim C.0000-0003-4437-0524
Additional Information:We thank the members of the UCSD and Caltech Theory Workshops for their comments and suggestions. Sobel happily thanks the National Science Foundation for partial support under grant SES-8408655.
Group:Social Science Working Papers
Funding AgencyGrant Number
Series Name:Social Science Working Paper
Issue or Number:573
Record Number:CaltechAUTHORS:20170915-144256949
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Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:81496
Deposited By: Jacquelyn Bussone
Deposited On:15 Sep 2017 21:59
Last Modified:03 Oct 2019 18:43

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