Taxpayers may either have a high income or low income, and they may be either opportunistic...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Taxpayers may either have a high income or low income, and they may be either opportunistic or honest. The tax collector cannot observe any of these characteristics, but after receiving a report from the taxpayer, it may choose to conduct an audit (at cost c) to determine the taxpayer's income. To simplify, assume low income taxpayers have no income, and high income taxpayers have income equal to 1. High income taxpayers owe a tax t, where 0 < t < 1, while low income taxpayers owe Honest taxpayers report their true income while opportunistic taxpayers are optimizers who report an income level (0 or 1) that maximizes net (after tax and penalties) income. The ex-ante probability a tax payer has high income is p, and independently, the probability that a taxpayer is honest is q. If the tax collector audits and finds the taxpayer underreported their income, the taxpayer is fined a predetermined penalty f = [0,1] in addition to any tax due. The tax collector's payoff is equal to expected revenue (including any penalties) minus audit costs. (a) (5 points) Draw the extensive form for this game (don't forget Nature's move). (b) (5 points) Compute a perfect Bayesian equilibrium for this game. How does the equilibrium vary with f, t, c, p, q. Explain the intuition. (c) (5 points) Suppose the tax collector is considering changing the penalty f to maximize expected tax revenue (keeping all other parameters fixed). What f should they choose (f cannot exceed 1 t)? Taxpayers may either have a high income or low income, and they may be either opportunistic or honest. The tax collector cannot observe any of these characteristics, but after receiving a report from the taxpayer, it may choose to conduct an audit (at cost c) to determine the taxpayer's income. To simplify, assume low income taxpayers have no income, and high income taxpayers have income equal to 1. High income taxpayers owe a tax t, where 0 < t < 1, while low income taxpayers owe Honest taxpayers report their true income while opportunistic taxpayers are optimizers who report an income level (0 or 1) that maximizes net (after tax and penalties) income. The ex-ante probability a tax payer has high income is p, and independently, the probability that a taxpayer is honest is q. If the tax collector audits and finds the taxpayer underreported their income, the taxpayer is fined a predetermined penalty f = [0,1] in addition to any tax due. The tax collector's payoff is equal to expected revenue (including any penalties) minus audit costs. (a) (5 points) Draw the extensive form for this game (don't forget Nature's move). (b) (5 points) Compute a perfect Bayesian equilibrium for this game. How does the equilibrium vary with f, t, c, p, q. Explain the intuition. (c) (5 points) Suppose the tax collector is considering changing the penalty f to maximize expected tax revenue (keeping all other parameters fixed). What f should they choose (f cannot exceed 1 t)?
Expert Answer:
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
Posted Date:
Students also viewed these finance questions
-
Bert Finney, CPA, was engaged to conduct an audit of the financial statements of Clayton Realty Corporation for the month ending January 31, 2008.The examination of monthly rent reconciliation is a...
-
You are planning to conduct an audit of Greystone Companys financial statements. As part of the audit, you will select a random sample of accounts receivable in order to estimate the proportion of...
-
Bert Finney, CPA, was engaged to conduct an audit of the financial statements of Clayton Realty Corporation for the month ending January 31, 2012. The examination of monthly rent reconciliation is a...
-
Ice Cool produces two different models of air conditioners. The activities, costs, and cost drivers associated with the production processes follow. Process Assembly Finishing Support Activity...
-
Continental Insurance Co. issued a policy to cover shipments by Oakley Fertilizer, Inc. Oakley agreed to ship three thousand tons of fertilizer by barge to Ameropa North America in Caruthersville,...
-
These containers are available in four sizes: huge, large, medium, and small, which can hold 50, 20, 5 and 1 widgets, respectively. The cost of each of the containers, at this time, is $35.00 (huge),...
-
In Section 6.5 .2 Computation Lab: Normal Plots in Unreplicated Factorial Designs, the factorial effects were sorted based on their magnitudes before plotting the normal quantile plot shown in Figure...
-
Three police officers, including Maria Trevizo, were on patrol in Tucson, Arizona, near a neighborhood associated with the Crips gang, when they pulled over a car with a suspended registration. Each...
-
3. Starting with the following AVL tree: 100 50 200 30 80 Perform the following operations cumulatively in the order given. For each operation draw: The tree after the operation but before any...
-
A sequential circuit is given in Figure 4-13. Figure 4-13 (a) Add the necessary logic and/or connections to the circuit to provide an asynchronous reset to state A = 1, B = 0 for signal Reset = 0....
-
The purpose of this assignment is to analyze liabilities when making business decisions. In executive summary to the Cardinal Health CEO, address the following. Explain the justification that could...
-
Which of the following is not typically a methodology to conceal the misuse of noncash assets? 1. Voiding sales at the warehouse liquidation location 2. Marking receiving documents as short 3....
-
One major difference between fraud and a mistake is: 1. Concealment 2. Cover-up 3. The act 4. Conversion (benefit to the perpetrator)
-
Did Enrons auditor fail or was the auditing firm a victim as well?
-
This is an unusual paragraph. Im curious how quickly you can find out what is so unusual about it. It looks so plain you would think nothing was wrong with it. In fact, nothing grammatical is wrong...
-
Investigate location and exploration. Evaluate a location-based game or gamified system and identify the ways that it encourages exploration in the real world. Are there elements or features that you...
-
The following summarized statements of financial position are provided for Romeo Inc. and Juliet Inc. as at 31 December 20X9: Non-current assets Investment in Juliet Current Assets Romeo Inc. $000...
-
Critical reading SAT scores are distributed as N(500, 100). a. Find the SAT score at the 75th percentile. b. Find the SAT score at the 25th percentile. c. Find the interquartile range for SAT scores....
-
The following additional information is available for the Dr. Ivan and Irene Incisor family. Ivan and Irene have the following investment income, in addition to that reported in Chapter 1: Dividends...
-
Rebecca and Walter Bunge have been married for 5 years. They live at 883 Scrub Brush Street, Apt. 52B, Las Vegas, NV 89125. Rebecca is a homemaker and Walt is a high school teacher. Rebecca's Social...
-
For each of the following cases, indicate the filing status for the taxpayer(s) for 2012 using the following legend: A - Single B - Married, filing a joint return C - Married, filing separate returns...
-
Bethany, who weighs 560 N, lies in a hammock suspended by ropes tied to two trees. One rope makes an angle of 45 with the ground; the other makes an angle of 30. Find the tension in each of the ropes.
-
In the Skycoaster amusement park ride, riders are suspended from a tower by a long cable. A second cable then lifts them until they reach the starting position indicated in Figure P5.3. The lifting...
-
A dump truck, whose bed is made of steel, holds an old steel watering trough. The bed of the truck is slowly raised until the trough begins to slide. What is the acceleration of the trough as it...
Study smarter with the SolutionInn App