Compatibility in Tax Reporting

Abstract

We consider corporate tax evasion when business partners have different attitudes towards aggressive tax accounting. There are costs of uncoordinated tax reports, both in terms of catching inspectors´ attention and running accounts. If these costs are small, there exist a unique stable Nash equilibrium of the game between the tax authority and a population of heterogeneous firms. In this equilibrium, the relation between compatibility costs and compliance is non-monotonic and depends on the curvature of auditing function. However, compatibility costs reduce non-compliance in low cheating regimes and may enhance it when many �firms are cheating. This provides one rationale for de veloping countries to be cautious with employing refined auditing schemes and for developed countries to promote complicated accounting procedures