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Optimal Audit Portfolio Design for a Tax Authority

Tax evasion is an important economic and social phenomenon. The most recent HMRC estimate of the tax gap places it in the region of £40 billion, which is about 8 per cent of total tax liability. Good tax administration is essential for reducing this gap. A reduction of the gap is also an HMRC Departmental Strategic Objective. Controlling the tax gap requires the implementation of an effective auditing strategy that is based on an understanding of the processes at work in the individual compliance decision.

An under-researched area of tax administration is the optimal design of portfolios of enforcement measures, for existing models assume that the tax authority performs only one type of tax audit. In practice, enforcement measures vary according to their cost and effectiveness, and the way in which they are targeted. The analysis will centre on the strategic interaction between taxpayers and the tax authority - how taxpayers will respond to a given intervention, and, given that, how the tax authority should optimally design a portfolio of intervention types. It will accommodate taxpayers who are heterogeneous in income, risk preferences, and attitudes towards compliance.

  • Outputs (1)