1. Suppose that the tax rate is 50% and the probability of getting caught evading...
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Accounting
1. Suppose that the tax rate is 50% and the probability of getting caught evading taxes is 20% plus an additional 10% for every $10,000 in tax evasion. (Hence, P = 0.2 + 0.1X, where X is measured in $10,000s of evasion.) Individuals who are caught evading taxes will be forced to pay the taxes they owe in addition to a $30,000 penalty.
a) What is the expected benefit of evading $100,000?
b) What is the expected cost of evading $100,000?
c) How much evasion will a risk-neutral taxpayer engage in?
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