If you cheat on your income tax return you will pay $1000 in taxes; if you don't cheat you will pay $2000. If you are audited and you didn't cheat, your auditor will be kind and reduce your taxes from $2000 to $1500. If you are audited and you did cheat, you will be caught and have to pay a total of $2500, including penalties. Assuming the government wants to receive as much money as possible, statistically, which is the best option for the government to choose?
A) always audit
B) usually audit
C) occasionally audit
D) never audit

Question

Quizplus · Accepted Answer

The government should occasionally audit because if they always audit, taxpayers may simply cheat less, resulting in lower overall tax revenue. However, if they never audit, cheaters will consistently pay less taxes, also leading to lower overall tax revenue. By occasionally auditing, the government can catch some cheaters and also deter others from cheating, ultimately leading to the highest tax revenue.

If You Cheat on Your Income Tax Return You Will