Rewarding the Consumer for Curbing the Evasion of Commodity Taxes?

Monetary or in-kind transfers (often granted through tax deductions) can be used as an incentive for consumers to request official receipts for goods they purchase. A novel system based on lottery tickets impressed on tax receipts has recently been introduced in China. These systems aim at exploiting the informative advantage that consumers, who are partners in each transaction, have over the tax auditors. This paper studies the effects of subsidies upon tax evasion in a competitive market, and describes their incidence and their effect on the government's revenue. The role of search costs borne by consumers who are looking for such subsidies and that of administrative costs are taken into account. Stylized facts about subsidies are recalled and interpreted on the basis of the theoretical results at which the paper arrives.