Optimal auditing for tax evasion

In tax evasion literature, many studies take tax rate, penalty rate, and audit rate exogeneously. The main aim of this study is to endogenise the audit rate and differentiate utility function for taxpayers according to their risk parameters. Tax payers decide whether or not to evade depending on tax rate, penalty rate, and audit rate imposed by the government and their own risk behavior, from there the rate of evaders is found. And by using this rate, the audit rate that maximizes the tax revenue function is found. Our results show that, in some cases while the highest audit rate provides the maximum tax rate, in other cases lower audit rate maximizes the tax revenue depending on the level of tax rate and penalty rate.