Optimal inspection policy and income-tax compliance

Abstract

In this paper, we present a review of the literature on optimal auditing of tax evasion and we fill some existing gaps with new results. The main contribution is to give a unified vision on the optimal audit policy when the Agency can pool the taxpayers as a function of the main activity they obtain the income from (because it determines their income distribution and their possibilities to evade), or as result of some additional information about them. We also study the consequences of the existence of a group of taxpayers who are characteristic since they are always honest.Tax evasion, optimal audit policy.