November 30, 2012
Gergen Presents Harnessing Conflict and Distrust as Drivers for Tax Compliance at Today Washington U.
Tax enforcement strategies that target third parties (e.g., reporting requirements, third party penalties, and whistle blower awards) create what is from the perspective of the taxpayer and the third party an agency problem for there will be a positive joint net payoff from misreporting a transaction. Distrust can make it difficult to solve this problem and so can make efficacious enforcement strategies that target third parties. However, such enforcement strategies can also breed distrust, imposing private losses by reducing the value of a transaction. This paper presents a simple model for analyzing the problem. The model uses a contract for home improvements in which a contractor can induce a homeowner not to report the transaction by revealing he is a tax cheat but at the cost of diminishing the homeowner's trust the contractor will perform as promised.
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