Corporate tax evasion with agency costs

Keith J. Crocker, Joel Slemrod

Research output: Contribution to journalArticlepeer-review

153 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)1593-1610
Number of pages18
JournalJournal of Public Economics
Volume89
Issue number9-10
DOIs
StatePublished - Sep 2005

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

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