Tax Evasion and Monopoly Output Decisions with Endogenous Probability of Detection

Abstract

The profit tax evasion and monopoly output decisions are examined in the uncerAbstract tainty model with endogenous probability of detection. When a rational but amoral, profit-understated firm in advance considers the probability of detection and punishment, the optimal output rate and the optimal cost-overstating factor will be deliberately determined The analysis shows that the effect of profit tax may be either production in excess, or less than, the conventional monopoly output level. The result suggests that the profit tax cannot be relied on for reducing the monopoly distortion.