In this case, the fraction of each type who dissembles on their income report becomes
The basic problem is this: When a taxpayer knows his own income but the revenue collector does not, the taxpayer may have an incentive to dissemble on his income report.
Thus, even taxpayers with large psychic costs of cheating may be induced to dissemble. We show however that a tax recovery strategy which combines aspects of a renegotiation policy and an asset seizure policy can reduce false bankruptcy claims while allowing the tax collector to obtain some of the benefits of renegotiation.
A taxpayer with income [Y.sub.1] therefore has an incentive to dissemble on her income report, ceteris paribus.
Type i individuals with [Y.sub.1] income dissemble when
If the psychic cost of dissembling is less than the critical value [[Epsilon].sub.i] ([Delta]), type i taxpayers will dissemble.
Type 1 taxpayers with a psychic cost less than [[Epsilon].sub.1] ([Delta]) dissemble and the incentive compatibility condition is fulfilled for type 2 taxpayers.
Type 1 and 2 taxpayers with a psychic cost less than [[Epsilon].sub.1]([Delta]) and [[Epsilon].sub.2]([Delta]) respectively will dissemble and the incentive compatibility condition will not be fulfilled.
When [Delta] [less than or equal to] [[Delta].sub.c], the population proportion of taxpayers who dissemble on their income reports is P([Delta]):
As either the audited proportion increases or the penalty increases, only taxpayers with low psychic costs are likely to file false reports, and overall, fewer taxpayers will dissemble.
With more progressive tax rates, even taxpayers with larger psychic costs will cheat and overall more taxpayers will dissemble.(12)
