Suppose the personal income tax rate is reduced and the penalties associated with tax evasion are reduced.Holding all else constant,which of the following must be TRUE?

Question

Quizplus · Accepted Answer

When the personal income tax rate is reduced, the incentive to evade taxes is reduced. However, if the penalties associated with tax evasion are also reduced, then the expected punishment for getting caught is lower. This makes tax evasion more attractive, but the marginal benefit of tax evasion is still reduced because of the lower tax rate. Overall, tax evasion may still decrease because the reduction in tax rates makes it less attractive.

Suppose the Personal Income Tax Rate Is Reduced and the Penalties