Taxpayer deductions and the endogenous probability of tax penalisation

Abstract

We propose a parametric specification of the probability of tax penalisation faced by a taxpayer, based on the amount of deduction chosen by her to reduce total taxation. Comparative analyses lead to a closed-form solution for the optimum tax deduction, and provide the maximising conditions with respect to the probability parameters.

Keywords: probability of tax penalisation; tax deductions; expected tax penalty