TAILIEUCHUNG - Tax Compliance by Firms and Audit Policy∗

The balanced scorecard approach to performance measurement was originally developed in the private sector4. If measurement focuses on sales and profits managers can appear successful in the short term while ignoring long term development of the business, for example customer relations or staff training. The balanced scorecard approach tackles this by measuring both the ultimate outcome of the business, and aspects of the business that need to be maintained in the long term. It is balanced between financial and non-financial measures and across stakeholders | Tax Compliance by Firms and Audit Policy Ralph Bayer and Frank Cowell University of Adelaide and London School of Economics September 2010 DARP 102 September 2010 The Toyota Centre Suntory and Toyota International Centres for Economics and Related Disciplines London School of Economics Houghton Street London WC2A 2A 44 020 7955 6674 We are grateful for comments from participants at the ESRC HMRC International Conference on Institutional Taxation the 9th Journées Louis-André Gérard-Varet and the 2009 meeting of the European Economic Association. f Correspondence Dr Ralph-C. Bayer School of Economics University of Adelaide North Terrace Adelaide SA 5005 Australia. Email Correspondence Professor Frank Cowell London School of Economics Houghton Street London WC2A 2AE. Email Abstract Firms are usually better informed than tax authorities about market conditions and the potential profits of competitors. They may try to exploit this situation by underreporting their own taxable profits. The tax authority could offset firms informational advantage by adopting smarter audit policies .that take into account the relationship between a firm s reported profits and reports for the industry as a whole. Such an audit policy will create an externality for the decision makers in the industry and this externality can be expected to affect not only firms reporting policies but also their market decisions. If public policy takes into account wider economic issues than just revenue raising what is the appropriate way for a tax authority to run such an audit policy We develop some clear policy rules in a standard model of an industry and show the effect of these rules using simulations. JEL H20 H21 Keywords Tax compliance evasion oligopoly Distributional Analysis Research Programme The Distributional Analysis Research Programme was established in 1993 with funding from the Economic and Social Research Council. It is located within the .

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