Corporate tax evasion: The case for specialists

We analyze the role of accounting specialists who help corporations evade/avoid taxes in a game of incomplete information played by a tax authority, corporate taxpayers, and an accounting specialist. In addition to a full equilibrium characterization, we establish that (i) marginal changes in enforcement are not effective when evasion/avoidance is pervasive; (ii) fines on firms as opposed to specialists are more effective in such situations; (iii) reducing auditing costs and increasing “creative accounting” costs are effective in curbing evasion when tax compliance is relatively high.

► Monopolistic tax specialist chooses either full cheating, or the separating equilibrium with an evasion level that is constant across incomes. ► Marginal changes in enforcement are not effective when evasion/avoidance is pervasive. ► Fines on firms are more effective in driving the economy away from complete evasion than are fines on the specialist. ► Reducing auditing costs and increasing “creative accounting” costs are effective in curbing evasion when tax compliance is high.