Tax Evasion and Corruption: Endogenous Deterrence and the Perverse Effect of Fines

In the proposed framework, larger fine for evasion will increase tax compliance with ambiguous effects on corruption. Complete dissipation of rents in the public sector implies that the bribe and the level of corruption move in opposite directions following an increase in the fine for evasion. A larger fine for corruption will reduce corruption at the cost of reducing tax compliance. Albeit surprising, this result suggests that setting harsh fines for corruption is not necessarily an effective instrument for reducing the underlying offence.