Policy implications of suboptimal choice: theory and evidence: misperceptions about tax audits

Abstract

For some entities, such as self-employed individuals reporting income taxes or firms reporting value-added taxes, the optimal evasion rate depends substantially on audit features like audit probabilities and penalty rates (Allingham and Sandmo 1972). Whereas it is easy for firms to find other important information such as inflation rates or exchange rates, it is difficult to find information about the probability of being audited and penalty rates. Indeed, Bérgolo et al. (2017) show evidence that firms have large misperceptions about these audit features.1 In this paper, we expand their analysis to explore the sources of these misperceptions.