The effectiveness of the tax rebate mechanism

Abstract In this paper, I present a model of cooperative or collaborative tax evasion between buyers and sellers; buyers are heterogeneous only in honesty or tax morale, and tax evasion occurs when sellers do not issue the receipt of transaction. The Government can avoid any bargaining between seller and buyers through a tax rebate offered to buyers who ask and keep the sales receipt. The main result is that the effectiveness of a tax rebate policy is strongly affected by the tax morale of buyers, an increase in tax proceeds is linked to an inefficiency due to a reduction in the aggregate quantity produced in the economy, otherwise a tax rebate program, although leads always a net increase in the total welfare, it has no effect on tax evasion, unless the government externally finances the tax rebate, because decreasing tax proceeds. This research tries to determine the conditions under which tax rebate becomes a sub-optimal policy, which is why it is not adopted by all countries in the world.