Costs and Benefits of Marginal Reallocation of Tax Agency Resources in Pursuit of the Hard-to-Tax

As a public sector project carried out by the tax administering agency, pursuit of the hard-to-tax is subject to a cost-benefit analysis. However, considerable intrinsic uncertainty of this project and endogenous dynamic relationship between costs and benefits make the standard model of cost-benefit analysis cumbersome and barely applicable. Two handy techniques may be used instead. One, encompassed by the concept of Marginal Efficiency Cost of Funds, is built around the expected return on the inspectors time invested in the audit process. As an analytical tool, this technique is potent in identifying a gradient of possible efficient reallocation of the tax agency resources; as an administrative tool, it tends to equalize the inspectors yield in the audit process. Both aspects are illustrated on the Israeli Income Tax Administration data. The second technique of cost-benefit analysis is Feinstein’s econometric Detection Controlled Estimation model. Amended here to include both type I and type II errors of incorrect detection of tax non-compliance.