December 20, 2003
Job Rotation, Corruption, and
Tax Administration in the Developing Countries

Do Ngoc Huynh
Visiting Scholar,
Policy Research Institute, Ministry of Finance, Japan
Abstract
This paper is purposed to make a theoretical model to illustrate the role of job rotation in
reducing tax evasion and corruption and consider an appropriate framework to apply the job
rotation system in tax administration in the developing countries. For the theoretical model,
we consider the role of rob rotation in a simple framework based on the principal-agent and
cooperation relations in the theory of tax administration, and find that there would be an
optimal time for tax inspectors to work with the same taxpayers that maximizes the expected
government revenue. This would play a role of the cornerstone for applying the job rotation
system in tax administration. Then, based on the Japanese experience, we discuss the issue
of how to apply the job rotation system in tax administration with emphases on difficulties,
feasibility, and necessary conditions for the implementation process under the context of
socio-economic conditions in the developing countries.
Keywords: Rotation; Specification; Tax Evasion; Corruption; Tax Administration
JEL Classification: J53, L22, C70, K42, D73

The author would like to thank Hosen Mitsuo, Kashiwagi Shigeo, Mutoh Shizuki, Satoh
Masayuki, Kuzumi Masayuki, and other members participating in a workshop on tax policy and
administration in developing countries at the Policy Research Institute of the Ministry of Finance,
Japan. He is also grateful to Ukai Yukio from the National Personnel Authority and Shimazaki
Masao from the Ministry of Finance’ Secretariat for providing useful information on the job
rotation scheme in the Japanese administration system. The views expressed in this paper are,
however, those of the author and do not necessarily reflect the views of affiliated institutions.
1
I. Introduction
The issue of tax evasion and corruption in tax administration has always been one of
the most disputed topics for policy-makers and economists in the developing world
nowadays. In the developed countries, where the tax system is quite functioned in the
condition of high economic development, corruptions in general and corruption in tax
administration in particularly are suppressed at relatively low levels. Being different
from the situation of corruptions in these countries, it is widely accepted that the
phenomenon of corruptions has been appeared everywhere in the developing countries,
especially in the process of tax compliance.1 There are, generally, many reasons for the
popularity of tax evasion and corruption in these countries. However, they could be
divided in three main groups consisting of the tax policy, the organization and
management of tax administration, and the checking system (Das- Guppta et al. (1999)).
Regarding to the tax policy, in the condition that the government faces many difficulties
and obstacles in the initial stages of economic development, the major measures of
reducing tax evasion and corruption, such as reducing tax burden, eliminating
preferential treatments, increasing incentives for tax inspectors, and setting a system of
heavy penalties on tax evasion and corruption, have certain limits in their real impacts.
On the other hand, the checking system might be too expensive and biased in the
condition of limited budget resources and asymmetric information in these economies.
Therefore, the system of organization and management of tax administration would
play an important role in reducing disastrous behaviors in the process of tax compliance,
including tax evasion and corruption, in the developing countries.
Regarding to the topic of organizational system in general, as well known in the theory
of industrial organization and the practice of the Japanese economy, the introduction of
the job rotation system might play an important role in improving the overall efficiency
of the whole system. Although job rotation has obvious disadvantages in some important
aspects, of which, the two most important ones are the deficiency of breaking down
specialization and the difficulty in application, it is noted for its main benefits from
positive effects on career development, motivations/renovations, flexibility, and
reductions in working stresses, boredom, and monotony, among others (Triggs and King
(2000), Cosgel and Miceli (1998)).2 This also explains why the application of the system
See Global Corruption Report 2003 (Transparency International (2003). Also see Bardhan
(1997), Rose-Ackerman (1997), Hellman et al. (2000).
1
2
Also Campion and Cheraskin (1994).
2
has been still limited in certain fields, sectors, or in some countries. When choosing
between two organizational schemes of job specialization (specific/assignment jobs) and
rotation, there would be usually trade-offs between advantages and disadvantages of
these schemes that need to be seriously considered. Generally, job rotation is supposed
to be the superior choice in cases of works requiring broad experiences, highly pressured
works, or not so high concerned costs in both material and mental aspects.
In this paper, we explore a special advantage of job rotation in reducing tax evasion and
corruption and consider the trade-off between the efficiency and the deficiency of job
rotation in tax administration in a simple theoretical framework of tax evasion and
corruption for developing countries.3 Based on the fact of these economies, we assume
that the tax inspector’s probability of finding out tax evasion and the probability of
cooperation between the taxpayer and the inspector are increasing functions of the time
that the inspector does his job with the same taxpayer. As the time increases, the
possibility of finding out tax evasion increases, and therefore, the expected government
revenue would be increased. However, the probability of cooperation between the
taxpayers and the inspector also increases along with the time. This would reduce the
expected government revenue. The solution of this trade-off relation would be the
optimal level of the time when its positive revenue effect is offset by its negative
cooperation effect. This theoretical model clearly illustrates the superiority of job
rotation in tax administration. However, it would be not easy to apply the system in the
developing countries, although its advantage in reducing tax evasion and corruption is
firmly recognized in the theoretical model. Therefore, we also need to analyze and
discuss the framework of job rotation in order to make the job rotation system feasible
and efficient in these economies.
The remaining of the paper is then organized as follows. In section II, we make a brief
literature survey on job rotation and tax evasion and corruption. The theoretical model
illustrating the important role of job rotation in reducing tax evasion and corruption is
presented in section III. Then, we will discuss the framework of job rotation in tax
administration for developing countries in section IV. Finally, section V makes
conclusions.
For theoretical models of tax evasion and corruption, in general, see Besley and McLaren (1993),
Hindriks et al. (1999), Polinsky and Shavel (2001), among others.
3
3
II. Literature survey
Job rotation and corruption in tax administration are usually considered as two
separate topics in the recent economic literature. Job rotation is mostly considered in
the context of industrial organization at the firm level. The relation between job rotation
and corruption has been rarely discussed. On the other hand, in the literature on tax
compliance, most of studies concern the aspects of tax burden, penalties, and incentives.
There has been also not much attention on the job rotation system and its effects on
reductions in tax evasion and corruption. Therefore, before combining these two issues
into an integral framework, it is necessary to make a brief outline of recent studies in
these fields.
1. Job rotation
There are many definitions of job rotation; however, there might be divided into two
main types: the narrow- and the wide definitions of job rotation, as presented in the
following figure.
Figure 1: Job rotation: the narrow and wide definitions
The inside rotation
The outside rotation
Organization A
Organization B
People
People
Works
Works
A1
X1
B1
Y1
A2
X2
B2
Y2
A3
X3
B3
Y3
…
…
…
Narrow definition
…
Narrow definition
Wide definition
4
Regarding to the narrow definition, job rotation is considered as transfers of employees
between jobs in an organization. In this case, job rotation is happened only inside the
organization, then, it might be called the inside rotation. However, there are also the
case of exchanging employees in certain fields/jobs between different organizations, the
outside rotation, such as the case of rotations between government agencies and
between government agencies and private organizations, as observed in the Japanese
economy. Then, the wide definition of job rotation includes both the inside rotation and
the outside rotation - the case of crossing transfers of employees between different
organizations. Of course, the difference between these definitions is only relative
because job rotation between divisions/departments in an organization or between
corporations in a holding group is the inside rotation for the whole organization but the
outside rotation for smaller units inside the organization.4
In organizations applying the system of job rotation, employees are usually not
remained in the same jobs/positions permanently but are to be transferred to do other
jobs/positions at some frequencies. They usually do not return to former jobs. There are
many arguments on the merits and demerits of job rotation. Regarding to the merits of
job rotation, most of the studies concern theories of industrial organization and
management system in the aspect of relationship between rotation and career
development. Studies on career development have recognized the importance of work
experiences that the career motivation can be influenced by experiences gained through
rotation (London (1983), Morrison and Brantner (1992)). Job rotation is also argued to
play important roles to job learning that can be viewed as an environmental strategy for
employees’ career development. The process of employees’ human capital accumulation
is believably dependent on their working experiences: the more they are rotated, the
more they learn. Hence, in the corporate management strategy, job rotation is also
considered as an important instrument for development (Sonnenfeld and Peiperl
(1988)).
For managers who are presumed to perform a variety of different roles, rotation would
be very important in the context of developing managers as generalists who can
understand and do jobs concerning a vast of issues in the concerned fields. Empirical
studies also find that work experiences were related to executives’ career opportunities,
learning, and changes in abilities, attitudes, and motivation (Guthrie and Olian (1991)).
See Aoki (1990) and Campion and Cheraskin (1994). It is also necessary to recognize the
European style of job rotation, which focuses on training employees (off-the-job training) and pretraining for the unemployed to work as substitutes (See Lehtinen and Lehtinen (2001)).
4
5
Practically, large organizations, such as multi-national corporations, frequently use
rotation to develop their networks of managers. There is also another aspect that
organizational socialization is considered as a process of information acquisition though
rotations, as showed in Ostroff and Kozlowski (1992). Job rotation may enhance career
development because of the adjustments and knowledge acquisition that new jobs
require. On-the-job factors, such as co-workers, supervisors, and experiences are
considered more important than off-the-job factors such as formal training and social
activities. Therefore, setting up the organizational framework of varying work
experiences through rotation might be considered as one important component for the
process of career development.5
Studying the cost and benefit of job rotation, there are also discussions concerning the
issue of job matching. In the job matching studies (Jovannovic (1979), Miller (1984)),
jobs and employees should be matched in the best way possible because of the job
specificity of human capital. However, the proficiency of employees in different jobs
could be only known if they actually try such jobs. Therefore, job rotation would be an
effective instrument for optimally allocating labor forces in case of asymmetric
information in the labor market. Looking at each employee performing different jobs,
the employer would find the job that is most suitable for him. Concerned the aspect of
job specificity of human capital, there are also some striking arguments that job rotation
would improve productivities of working more than specialization. Considering job
rotation as a learning mechanism in a clear theoretical framework of the job specificity
of human capital, Ortega (2001) compared job rotation to an assignment policy, and also
showed that job rotation would be a better learning mechanism than specialization
when there is little prior information about the relative profitability of different jobs/
works. Relative gains from job rotations are higher than specialization when the initial
uncertainties about employees and technologies become larger. Empirical works also
support the view that firms using new technologies are likely to use job rotations.6
Beside the above economic merits, there are also other advantages of job rotation in the
social and welfare aspects. They are reductions in boredom and monotony, work stresses,
and CDT (cumulative trauma disorders)… It is widely believed that a proportion of
employees would feel bored and monotonic with the same works for long periods. On the
5
Also see Buchanan (1974) and Jones (1986).
Gittleman et al. (1998) showed the probability of job rotation is 22.3 percent for the firms
introducing technology (compared with the average ratio of 9.6 percent) in a sample if over 5,800
US firms in all industries in 1993.
6
6
other hand, some of them, especially the young, want to challenge new jobs in new
working environments and enjoying new working relations with new people. In many
cases, working in the same place and maintaining long relations with the same
colleagues would cause stresses and CDT for employees, which are negatively affect
their utilities. Therefore, job rotation could be considered as a possible choice to improve
employees’ welfare that might not concern economic incentives.7
On the demerits of job rotation, they have been considered in many aspects. The biggest
and foremost disadvantage of job rotation concerns specialization. As widely accepted in
the economic literature, from classical economists like A. Smith or K. Marx,
specialization is one of the major engines for renovations and enhancing working
efficiency. Job rotation clearly restrains the degree of specialization. Therefore,
cost-benefit analyses of choices between rotation and specialization would be very
important. Job rotation should be only applied when it produces benefits that are higher
than losses from reductions in specialization (Cosgel and Miceli (1998, 1999)). In the
fields requiring specialists with deep knowledge or working skills and experiences in the
same jobs, such as some works in high-tech industries and scientific researches, job
rotation at relatively frequent levels might be questioned.
Besides, job rotation has close relations with the work structure, workplace relation and
culture, and employees’ behaviors. As usual, experienced employees do not want to do
new types of jobs or handover their currently good conditions or share their knowledge
and experiences of working to newcomers. It is also very difficult to identify appropriate
job for each people in the organization in the process of rotating. On the other hand,
there are usually not small costs of rotating, including both material-and non-material
costs, such as changes in the living environments, customs and cultures, especially for
the employees’ side (MacLeod and Kennedy (1993), Triggs and King (2000)). This is why
the system of job rotation has not been popular in the world economy, and only relatively
big organizations with a well-performed management system can apply the system
efficiently. Generally, considering the job rotation system to apply, all aspects of
cost-benefit analyses, the organizational structure, the system of work evaluation, as
well as the period and timing of rotation should be carefully reviewed.
See Hazzard et al. (1992), Triggs and King (2000), among others. It should be noted that Cosgel
and Miceli (1998) considered an organization model of analyzing costs and benefits of job rotation
and recognized the importance of job satisfaction and attributes.
7
7
It is also necessary to consider the job rotation system in Japan as a fairly successful
and unique example in the economy-wide scale of application. The Japanese economy
started to apply and develop the system in the 1950s. There are many studies indicating
important roles of the system to the Japanese miracle in the high growth period. The
system of lifetime jobs with rotations is one of the most distinguished features of the
Japanese economy. Not only the private sector, the system of job rotation has been
applying in government agencies, and up to present, it has generally been still rather
functioned. Why does the job rotation system go well in Japan but not in somewhere else
in the world? As pointed out in Dutton (1987), “The strong traditional permanent
employment in larger Japanese firms, especially for the managerial group, makes job
rotation possible and feasible”. Historically, the Japanese economy, especially the labor
market, has been different from other economies in many aspects. A typical Japanese
employee usually stays in the same organization until their retirements. During his
period of staying in the same organization, he experiences many jobs, working positions,
and moves towards the top of the pyramid of the management structure in that
organization. This is so-called the lifetime job system, and considered as unique in the
world. Ouchi (1981) also certified the non-specialized career path as one of the
fundamental features of Japanese firms.8
Beside the management structure, there are many other factors supporting the job
rotation system in Japan. Among others, the wage system in Japan is mainly based on
the length of time working at the organization (employees’ ages), therefore, the system
of job rotation would not cause much troubles concerning employees’ earnings. On the
other hand, job rotation has become a custom/culture of business administration, and
been widely accepted by the public. In addition, Japanese people are noted for their very
diligences at the work. Their attitudes to works and responsibilities for their works are
extremely high. The organizational socialization of the Japanese people is also notably
respected so that the implementation process is quite smooth and functioned.9
Overall, we see that almost studies analyzed the job rotation system in the aspect of
industrial organization and management structure. At the firm level, although having
Also see Koike (1984), Aoki (1990), among others. For recent empirical studies on job rotation in
Japan and US, see Kusunoki and Numagami (1998) and Campion and Cheraskin (1994)
8
It should also be noted that, as showed in the study of Mourdoukoutas and Roy (1994), job
rotation is higher in Japan than in the US partly because anticipatory job mobility is higher in
Japan than in the US, due to the fact that the culture and labor policy in Japan encourages
anticipatory job rotation, meanwhile the US labor policy provides assistances after an employees
lost his job.
9
8
disadvantages because of the negative effect on specialization and the difficulty in the
implementation process, job rotation is noted for its advantages in career developments/
working experiences, flexibility, reductions of working stresses, boredom, among others.
In practice, the Japanese economy has been successfully applying the system due to her
special and unique socio-economic conditions at both micro and macro levels. However,
looking at the concerned literature, the relation between job rotation and corruption,
specifically corruptions in tax administration, has generally still not attracted much
attention of studies on the field.
2. Tax evasion and corruption
Tax evasion and corruption in tax administration has been a regular topic in the
economic literature, as noted above. Regarding to the theoretical aspect, there are many
studies exploring the principal-agent relation in tax administration and cooperative
games between taxpayers and inspectors. Historically, the first study on tax evasion
might be the seminal paper of Allingham and Sandmo (1972). As showed in this study,
it is necessary to audit or investigate the taxpayers’ reported income in order to deter or
reduce evasion. The tax authority (auditor/inspector) is responsible for making justice in
tax compliance by finding out the real taxable income and imposes a penalty rate
(higher than the tax rate) in case of tax evasions. However, in a hierarchical structure
where the principal delegates a task to agents, there would be the cases these agents
cooperate with taxpayers to lower their tax liabilities. Then, after the collusion in a
hierarchy was formalized by using the principal-agent framework (Tirole (1986),
Kaufman and Lawaree (1993)), there have been emerged a bulk of studies on tax
evasion and corruption in tax administration.
In these studies, the possibility of cooperation between taxpayers and inspectors would
be appeared when the concerned cost is relatively low.10 The problem of optimal tax
scheme is usually regarded in the aspects of tax schedule (burden), penalties and
incentives for taxpayers and inspectors, and schemes of auditing and investigations.
Besley and McLaren (1993) considered a framework with both honest and dishonest
agents, compared three distinct remuneration schemes of reservation, efficient, and
capitulation wages that provide different incentives to the inspectors. They
characterized the conditions under which each scheme generates the greatest amount of
net tax revenues after abstracting administration cost. On the other hand, in
10
Also see Shleifer and Wishny (1993), Wane (2002), Acconcia et al. (2003)
9
Mookherjee and Png’s (1995) paper, they considered corruptible agents with a moral
hazard problem that inspectors have to exert costly non-observable efforts to disclose
evasions, and found that although bribes encourage the inspector to monitor, it should
be better when compensation policies are adjusted to eradicate them. Then, Hindriks et
al. (1999) studied a model consisting of all dishonest agent with the distinction of setting
flexible tax schemes and allowing extortion that the inspector might overstate the
taxpayer income. They also proved that imposing progressive taxes without measures of
presenting evasion and corruption would make bribes on high-income reports. 11
Recently, Polinsky and Shavel (2001) analyzed a framework of bribery, distortion, and
framing, and found two ways to reduce corruption, consisting of imposing sanctions and
rewards for reporting violations with optimal penalties and rewards schemes.12
Now, we consider the situation of tax compliance and tax administration in the
developing countries for looking stylized facts to build the theoretical model in the next
section. Tax administrations in the developing countries have arguably been mostly
corrupted. As presented above, difficulties and obstacles in the socio-economic
conditions in these economies make the picture different from that in the developed
economies. In these economies, beside reasons of tax evasion and corruption concerning
the tax policy and the checking system, the weak tax administration system itself has
been also an important background for developments of tax evasion and corruption.
There would be two important issues concerning the tax administration: the
organizational structure and management system, and the officers’ and taxpayers’
attitudes. Regarding to the organizational structure and management system,
shortages of modern management frameworks and modern technologies’ assistances
make the system out-of-date, less flexible and transparent, and inefficient. The
reporting system and the information processing system, which play major roles in tax
enforcement, are usually weak and inadequate. For the tax administration purposes,
both systems of inside relations and outside relations are always questionable in all
aspects. Tax inspectors are usually authorized to work with their taxpayers for long
periods without a strictly reporting system and frequently investigations. This might be
The results that the expected government revenues might be reduced when there are increases
in the fine rate or the tax rate can be also seen in Graetz et al. (1986), Chander and Wilde (1992),
among others.
12 Regarding to the solution and distribution of premium from engaging in tax corruption, as in
most of the literature on corruption, the bribe the taxpayer pays the inspector is the solution of a
Nash bargain and they mutually agree to report the income that maximizes their joint profit
(Kreps and Wilson (1982), Cho and Sobel (1990)).
11
10
considered as one of the main reasons for cooperation between inspectors and taxpayers
that lead to tax evasions and corruptions. Even in the case of investigation by
higher-level officials, there are usually further bargaining-cooperation steps in the
hierarchical organization. That is why it would be not exaggerated to say that tax
evasion and corruption in the developing countries is systematic and serious.13
Regarding to the tax officers and taxpayers’ attitudes, because average levels of per
capita income and living standards in the developing countries are relatively low, most
of taxpayers and tax officers would have motivations for tax evasion and corruption at
some certain levels. Moral hazards and adverse selection might be happened in tax
compliance in both sides of taxpayers and tax officers. For taxpayers, under the
condition of popularity of tax evasion, they would be forced out of the game if being
honest in the competitive market. In the tax officers’ sides, because of low wage, by
touching with opportunities to make money, they would take their chances. The honest
officers would be also forced out of their works, partly because of low income, partly
because of being strange to their colleagues. Even in the case of initial honest tax
officers, after a long time touching with a possibility of making a large amount of money
in a relatively safe way in the condition of low salary, they would be engaged in
corruptions.
Looking overall, we see that the organization and management aspect would be very
important in reducing tax evasion and corruption in the developing countries. The
model developed in the next section is then based on the theoretical arguments of job
rotation and tax compliance in the recent economic literature and the stylized fact in tax
administration in these countries that the structures of tax administration are
relatively static in terms of rotating and exchanging their officers. This is considered as
one of the major reasons for cooperation between taxpayer and tax officers to engage in
tax evasion and corruption in the difficult socio-economic conditions. This model is
different with the current literature on job rotation in the aspect that it focuses on
analyzing the aspect of cooperation between taxpayers and tax officers. Comparing with
the existed theoretical studies on tax evasion and corruption, we concentrate on the
aspect of the time (period) that tax officers touch the same taxpayers, which considered
as a necessary of cooperation for engaging in tax evasion and corruption.
13
Also see Kaufman (1997), Gill (2000), Asher (2001), Fisman, R., and Svensson (2002)
11
III. Theoretical Model
1. The framework
Based on the stylized facts of the developing countries, we use a simple framework of
studying tax evasion and corruption and integrate the factor of the time required for
cooperation between agents into the framework to analyze effects of job rotation on tax
evasion and corruption. There are four types of agents in the model: the government, tax
inspectors, taxpayers, and auditors. The government announces the tax scheme,
consisting of the tax schedule, penalties for the case of reporting income below the real
levels for both taxpayers and inspectors, incentives for the inspectors to encourage them
to do their jobs. The representative taxpayer is subjective to the tax scheme announced
by the government. She is to maximize her payoffs, given the tax scheme. We also
assume that she is tax-evasion-driven, as popularly observed in the developing world.
The inspectors are responsible for investigating whether the taxpayers report precisely
their real income levels or not. The probability of finding the real income is assumed to
be dependent on the time that the representative inspector does his job with the same
taxpayer. This reflects the advantage of “specialization” in tax investigations. On the
other hand, the inspectors are corruption-driven, which reflects the popular situation of
corruption in tax investigations in the developing countries. The inspectors and
taxpayers may negotiate to engage in tax evasion and corruption. However, the process
of negotiation is to depend on mutual beliefs between them. This is also a distinguished
feature of this study. Besides other factors affecting the process of negotiation, especially
the profitability of cooperation, we supposed that the length of the time working with
the same partners would be the main reason to strengthen the spirit of cooperation
between them, which lead them to negotiate to engage in tax evasion and corruption
(evasion for the taxpayer, corruption for the inspector). This is the disadvantage of
“specialization” in tax investigations. We also already noted that even in the case of
honest inspectors, to work with the same taxpayers in the long time would make them
gradually becoming the dishonest.
Beside the tax inspectors being responsible for investigating the taxable income, an
independent auditing agency enters the picture to make the justice of tax compliance.
One this agency audits tax reports, they will find the real income. However, the cost of
auditing is assumed quite large so that the probability of auditing is rather small. On
the other hand, because they do not know which case is tax evaded and corrupted, the
12
choice of auditing tax reports would be incidental.
Looking at the framework, we see that job rotations for inspectors are able to resolve the
conflict between the advantage and disadvantage of “specialization” in tax
investigations. Job rotation would significantly affect tax inspectors in many positive
and negative aspects, as the recent literature on industrial organization suggested.
However, in this paper, we focus on analyzing its effects on reducing tax evasion and
corruption under the context of social economic environment in developing countries. As
regarded above, tax evasion and corruption is popular in these countries. The tax policy
and the systems of penalties and incentives have limits in their real effects under the
socio-economic conditions of the developing world. Therefore, besides other policies
measures, the government can also apply the system of job rotation to cut off mutually
deep relations between taxpayers and inspectors, which are considered as one of the
main reasons for tax evasion and corruption. In the model developed in this section, we
prove that job rotation would reduce the possibility of cooperation between taxpayers
and inspectors, although it would have a natural problem concerning the inspectors’
working proficiency.
2. The process
Based on the facts of tax administration, the process of tax compliance is assumed to
consist of three stages, as follows.
Stage 1: The government announces the tax scheme,
S  {  , f i ( r , ),w, },
where  , , r , f i ( r , ), w, are the tax rate, real (taxable) income, reported income,
penalties on the representative inspector and the representative taxpayer (i = I, T),
fixed wage and incentive rate for tax inspector, respectively. This tax scheme, including
the functions of penalties and incentive, is popularly applied in the world economy
nowadays, especially the developing countries.14
With a given level of the real income, the penalty functions are strictly concave on the
level of the reported income, as follows,
The tax rate might be varied, as a function of income. However, for simplicity, we assume that
the tax rate is flat. The case of varied tax rates would have no significant impact on the results of
the model. Furthermore, excluding the individual income tax, most types of taxes, such as the
corporate income tax, are usually flat-rated taxes.
14
13
f i '  0 , f i ' '  0 , f i ' (  , )   , f i (  , )  0.
(1)
Because the evasion amount is the gap between the real income and reported income,
the fine would be zero when the amount of tax evasion is zero, and strictly increasing
with the amount of tax evasion. The fine level is higher than the tax liability for every
amount of tax evasion.
Stage 2: Income reporting, investigating, and negotiating
The representative taxpayer reports the level of income r, r   . This level is set up to
maximize her net income, given the tax scheme and the inspector’s probability of finding
out the real income. The representative inspector investigates to find the reality of the
reported income with the probability of finding out the real income as follows,

 ( t )  [ 0 ,1 ],'  0 , if t  [0,t ],
 

1 ,
if t  t .
(2)
Of which t is the length of the time that the inspector does his job with the same
taxpayer (called the time for short, hereafter). The function (2) means that the inspector
needs time to find out the real income.15 The probability of finding out the real income
is an increasing function of t when t  [ 0 ,t ] . When t  t this probability is equal to
unit. In other words, t is the length of time for surely finding out the real income,  .
Now, we consider the process of negotiation between the taxpayer and the inspector.
There are two conditions for making negotiation between them successfully. The first is
that the cooperation would be profitable for both of them. This means when they agree
to report some level of income and accept some level of bribe, both of them are better off
in terms of net income. On the other hand, the negotiation process between the
inspector and the taxpayer is also supposedly dependent on the time, t. This is because
they only cooperate when the relation between them reaches certain levels of closeness,
deepness, and mutually believing and understanding. As we noted above, they are all
human being; therefore, the more the time to work together, the higher the level of
mutual belief and close relation between them. The probability of negotiation is then as
follows,
There would be also the case of considering the inspector’s effort; however, we assume that it is
given in order to concentrate on analyzing the time’s effects. The case concerning the inspector’s
effort can be analyzed by introducing a variable of inspector’s effort in this function. However, the
results of the model would not be changed significantly.
15
14
 p( t )  [ 0 ,1 ], p'  0, when t  [0,t p ],

p
when t  t p .

1,
(3)
We assume that t  t p , which means that the limit of time for surely cooperating is
shorter than that for surely finding out the real income.16 Besides, it is supposed that
both the taxpayer and the inspector are risk-neutral so that we can concentrate on
analyzing the effects of the time in the model.
Stage 3: Auditing
The independent auditing agency is responsible for auditing the preciseness of tax
compliance. We assume that the probability that the agency audits a tax report is  , a
given parameter. When auditing, the agency always find out the real income. If the
reported income is less than the real income, both the taxpayer and the inspector will be
fined according to the announced tax scheme, as presented above. The probability of
auditing  is assumed rather small because the heavy cost of auditing, as regularly
cited in the economic literature and the real world.17
3. Analyses
Based on the above process, we can describe the game in the tax administration as that
in Figure 1. The left hand is the case of no cooperation with the probability of 1-p(t);
meanwhile, the case of cooperation with probability of p(t) is presented in the right
hand.
In this figure, we use the following signs: U is the net income of the taxpayer, V is the
net income of the inspector. For upper signs, NA is for the case of not being audited;
meanwhile A is for the case of being audited. In the lower signs, NN is for the case of no
cooperation and the real income not recognized by the inspector, NR is for the case of no
cooperation and the real income recognized by the inspector, and C is for the case of
cooperation between the taxpayer and the inspector.
We can also examine the case when the limit of time for surely finding the real income is
shorter than that for surely cooperating ( t  t p ). At some certain level of the gap between these
16
two limits, the results of the model would not be changed.
We also assume that there is no relation betweens the auditing agency and the inspector and
taxpayer so that they are well functioned: there would be not further bargaining processes.
17
15
Figure 1: The game in tax administration

1-p
No cooperation
p
Cooperation
rN
rC
1

1 

rN


rC
U CNA ,VCNA
1 

rN
NA
U NN
NA
,V NN
1 

A
U NN
A
,V NN
U CA ,VCA



NA
NA
U NR
,V NR
A
A
U NR
,V NR
Considering the payoffs for agents in the game, namely, the representative taxpayer, the
representative inspector, and the government, as presented in Figure 1, we need to
analyzes both two cases: (i) no cooperation between the taxpayer and the inspector, and
(ii), cooperation between the taxpayer and the inspector. In the first case, the taxpayer
faces the inspector’s probability of recognizing the real income,  ; meanwhile in the
second case, they mutually agree on the level of reported income. In each case, the
probability of auditing is the same,  , as regarded above.
3.1. The case of no cooperation
For the inspector, supposing that the taxpayer reports the income r, r   , as
presented above (r is called the taxpayer’s reported income), in the case of not being
audited, because the probability of finding out the real income is  ( t ) , the inspector’s
expected income would be as follows,
NA
NA
V NNA  ( 1   )V NN
 V NR
 w   [( 1   )r   ].
In the case of being audited, his expected income would be,
16
A
A
V NA  ( 1   )V NN
 V NR
 w   [( 1   )r   ]  ( 1   ) f I (  , r ) .
Therefore, with the probability of auditing  , the expected income of the inspector in
the case of no cooperation is then,
VN  ( 1   )VNNA  VNNA  w   [( 1   )rN   ]  ( 1   ) f I (  ,r )].
(4)
We can see that this expected income in the equation (4) is dependent on the time t and
the reported income r.
Now, we consider the expected income of the taxpayer. Similarly, for the case of not
being audited, the expected income would be,
NA
NA
U NNA  ( 1   )U NN
 U NR
   ( 1   )r   [   f T (  ,r )] .
Meanwhile, in the case of being audited, it would become,
A
A
U NA  ( 1   )U NN
 U NR
     f T (  , r ).
With probability of auditing  to find out the real income  , the taxpayer’s expected
income would be as follows,
U N  ( 1   )U NNA  U NA
 ( 1   )[   ( 1   )r   [   f T (  , r )]   [     f T (  , r )]
     ( 1   )( 1   )(   r )  [( 1   )   ] f T (  , r ).
(5)
We can see in equation (5) that the condition of engaging in tax evasion is,
PNT  ( 1   )( 1   )(   r )  [( 1   )   ] f T (  , r )  0 ,
(6)
where PNT is the expected gain for the taxpayer from tax evasion. In the right hand of (6),
the first expression is the expected gain from evasion, and the second expression is the
expected loss. Therefore, tax evasion is happened only if the expected gain is larger than
the expected loss.
Considering the behavior of the taxpayer, she is to report the income level that
maximizes her net income (the after- tax and penalties income). Then, the maximization
problem for the taxpayer would be MaxrU N  Maxr PNT . From (5) and (6), we have,
17
U N PNT
f

 ( 1   )( 1   )  [( 1   )   ] T .
r
r
r
From the maximization problem of the taxpayer and the characters of the function f T
in (1), we have the optimum choice for the taxpayer as follows,
fT
( 1   )( 1   )
1  2

rN , where r  f T '     ( 1   ) , when     2( 1   ) ,
r*  

when    .
 ,
(7)
The optimization level of the taxpayers’ reported income is determined as described in
the following figure.
Figure 2: The optimal level of the reported income
f T ( r , )
f T ( 0 , )
fT '  
( 1   )( 1   )
  ( 1   )
f T ( r , )

r

rN
1  2
1
 when  is rather small. Then we have “the rule of 1/2”
In equation (7),  
2( 1   ) 2
as stated in the following proposition.
0
Proposition 1. In case of no cooperation, if the function of penalty for the taxpayer is
strictly convex (the penalty is always higher than the tax revenue), when the probability
of auditing is rather small, the taxpayer will report the real income when the inspector’s
probability of finding out the real income is from about 1/2.
Intuitively, because the penalty is always higher than the tax liability, the rational
18
taxpayer would report the real income when she knows that the probability of the real
income being recognized by the inspector is from about 1/2. Otherwise, she would face
the expected loss from the tax evasion. If the probability is smaller than this level, she
will choose to report some level of income less than the real income, as showed in (7).
Now, we consider changes in the optimal level of the reported income with respect to t.
From (1) and (7), we have:
 ( 1   )' 

2
rN
 [   ( 1   ) ]  0,
 rN '  
fT ' '
t

0 ,

where t N is determined by  ( t N )   
when t  t N ,
(8)
when t  t N ,
1  2
.
2( 1   )
Looking at (8), the level of reported income would be increased with t until when t is
high enough such that the taxpayer would report the real income (Figure 3).
Figure 3: The dependence of the optimal level of the reported income on t
rN

rN ( t 2 )
rN ( t )
rN ( t1 )
rN ( 0 )
0
t1
t2
tN
From (8), at the optimum choice of rN we have,
19
t
t
 ( 1   ) [(   rN )' ( 1   )rN ' ]  [( 1   )   ] f T ' rN ' ( 1   ) f T ' 
U N 
  ( 1   )[(  rN )  fT ]'  0,
when t  t N ,
(9a)
t

0 ,
when t  t N ,
(9b)
of which  / t  '  0 . Equations (9a) and (9b) mean that when t  t N , the expected
income of taxpayer is only negatively affected by the direct effect of t on the inspector’s
probability of finding out the real income. The indirect of t on the reported income rN is
zero because rN is at the optimal level of the reported income. On the other hand,
when t  t N , the taxpayer would report the real income, and then, the reported income
would not be affected by t.
Regarding to the trend of changing in the inspector’s expected income, we see that it is
dependent on the time, t, and the taxpayer’s reported income, as regarded above. Then,
when the reported income is rN , from (4), (7), and (8), we have,
VN 
 [( 1   )rN ' (   rN )' ]   [ f I ' ( 1   ) f I ' rN ' ]  0, when t  t N ,

t
0 ,
when t  t N .

(10)
From equation (10), we see that when t  t N , the inspector’s expected income would
increase in t. Here, both the direct- and the indirect effects of t on the income are
appeared. When t increases, the probability of finding out the real income increases;
therefore, the expected incentive income would increase. On the other hand, the
expected penalty would be also reduced. When t  t N , the taxpayer reports the real
income, and then, the inspector’s expected income would be not affected by t.
<Government revenue>
The expected (net) government revenue in this case is, therefore, as follows,
  ( 1   )( 1   )(   r )  [   ( 1   ) ] f T (  , r )

G N    ( U N  U N )   w   [( 1   )r   ]   ( 1   ) f I (  ,r ), when t  t N ,

  w   ,
when t  t N .
The evolution of the expected government revenue is then,
20
(11)
  U
V N
N

G N   t  t
 
t

0,

 , when t  t ,
N


(12)
when t  t N .
When t  t N , we assume that,
GN
 [( 1     )(   rN )  ( 1   ) fT  f I ]' ( 1   )(   f I ' )rN '  0.
t
(13)
In (13), the first expression in the right hand is positive, but the second expression is
negative. However, because the incentive rate would be not so high and the probability
of auditing is rather small, as usual observed, the revenue effect is then higher than the
payment effect. Intuitively, increases in the government revenue due to increases in the
reported income are to be higher than increases in the net payments to the inspector
and the taxpayer. This is also reasonable for the real world of tax administration. The
increase in the tax revenue would be not used totally for paying the inspector because it
would largely affect the inequality in income distribution in the society.
3.2. The case of cooperation
Supposed that when the taxpayer and the inspector cooperate to report some level of
income r and agree on the level of bribe is b, the taxpayer’s expected income would be
dependent on the probability of auditing, as follows,
U C  ( 1   )U CNA  U CA  ( 1   )[  r  b )   [     f T (  , r )  b ]
     ( 1   )(   r )  f T (  , r )  b.
(14)
Similarly, the inspector’s expected income would be,
VC  ( 1   )VCNA  VCA  ( 1   )[ w  r  b ]   [ w  r  b  f I (   r )]
 w  r  f I (   r )  b.
(15)
As usual, the maximization problem of cooperation is then to maximize the expected
joint income, as follows,
Maxr PC  U C  VC
 ( 1   )  ( 1   )(   r )   [ fT (  , r )  f I (  , r )]  w  r .
21
(16)
Then we have the optimal value of reported income in case of cooperation,
r  rC where fT ' ( rC )  f I ' ( rC )  
[( 1   )   ]

.
(17)
When the probability of auditing is small and the incentive rate is not so large, there
would exit an optimal level of the reported income, as determined in (17). We have the
following proposition.
Proposition 2. In case of cooperation, the optimal level of the reported income is unique
and not dependent on t.
As showed in (16), and (17), at low levels of r the gain from tax evasion would be higher
that the loss from penalties. However, because the functions of penalties are convex, the
amounts of penalties would increase rapidly when r increases, and after some certain
level of r, increases in the gain from tax evasion would be less than losses from increases
in penalties. Because both functions of penalties are assumedly not intersected, there
would be a uniquely optimal level of r that makes the expected (net) joint income
maximized. This level is not dependent on the time, t. Intuitively, when the taxpayer
and the inspector cooperate, they would not care about anything else but the expected
joint income.
<Government revenue>
The expected government revenue in the case of cooperation is as follows,
GC    U C  VC    ( 1   )(  r )  fT (  ,r )  f I (  ,r )  r  w.
(18)
As we can see in the above equation, there would not be the revenue on penalties in the
case that the inspector recognizes the real income of the taxpayer because they
cooperate to report an optimal level of income that maximizes their expected joint
income.
<The bribe>
The premium from cooperation would be divided based on bargaining powers of each
partner in the cooperative game. Assuming that the bargaining powers are equal, the
level of bribe would be as follows,
P ( U C  U N )  ( VC  VN )

.
(21)
2
2
Generally, the level of bribe is considered as the solution of a Nash bargaining problem
b
22
between the taxpayer and the inspector.18 However, for the purpose of studying, we only
concentrate on analyzing corruption; therefore, we assume that their bargaining powers
are equal so that the premium from cooperation would be equally divided between them.
<The condition of cooperation>
As noted above, there are two factors deciding the process of cooperation. One is that
cooperation is beneficial for both players. The other is the time that the inspector works
with the same taxpayer. Because we are dealing with the case of cooperation, we only
consider the later. Supposing they cooperate, regarding to the first condition, the
expected joint income from cooperation should be higher than that from no cooperation.
Therefore, the condition for cooperation would be as follows (P is the expected joint
profit),
P  ( U C  U N )  ( VC  VN )  ( U C  VC )  ( U N  VN )  0.
(19)
Otherwise, they would never cooperate. In case of cooperation, because the value of the
first parenthesis in (19) doest not depend on t, we have,
U N VN
GN
P
 (

)
 0.
t
t
t
t
(20)
Therefore, we can see that there might be two cases depending on the parameters of the
model: (i) cooperation is always beneficial; and (ii), cooperation is only beneficial when t
is large enough.
For the second case, we assume that at some small level of t, cooperation might not be
beneficial ( G N  GC ), especially when the inspector’s probability of discovering the real
income is relatively low at the initial period. When t increases, the inspector’s
probability of discovering the taxpayer’s real income increases, and therefore,
cooperation will become beneficial ( G N  GC ). Then, there might exist some t C  [ 0 ,t p )
at which P( t C )  0 . When t  t C , the cooperation would not be beneficial; meanwhile
when t  t C , cooperation becomes beneficial. Therefore, only when t  t C , the
cooperation between the taxpayer and the inspector is possible. We also assume
GN ( t p )  GC so that there would always be the possibility of cooperation.
18
Also see Choo and Krep (1987), Hindriks et al. (1999).
23
3.3- The expected government revenue
As regarded above, there would be two possible cases of cooperation: cooperation is
always beneficial, and cooperation is only beneficial when t is large enough. Then, it is
necessary to consider the expected government revenue for both these cases. The
expected government revenue should be understood as the (comprehensively) expected
government revenue when considering the possibility of cooperation between the
taxpayer and the inspector. We suppose that the government pursues the objective of
maximizing the expected government revenue. The only way they can do that is to
change the time that the inspector does his work with the same taxpayer. This could be
implemented through introducing the system of job rotation. Therefore, by considering
the evolution of the expected government revenue, and through the results of analyses,
we can perceive effects of the rotation system in pursuing the objective of maximizing
the expected government revenue.
Case 1: Cooperation is always beneficial
The expected government revenue is determined in the following formula,
[ 1  p( t )]G  p( t )G  G  ( G  G ) p( t ), whent  t p ,
N
N
N
C
C

G
GC ,
when t  t p .

(22)
Looking at equations (22), when t  t p the change of G would depend on the slope of
p( t ) and GN ( t ) . Based on the evolution of these functions, we have the following
proposition.
Proposition 3. If cooperation is always beneficial, GN ( t ) is concave, p(t) is linear or
convex, and when t  0  ,
G N / t G N  GC

,
p / t
1 p
There exists a unique value of t  (0 ,t p ) that maximizes the expected government
revenue. This optimal value of t is determined where
G N / t
p / t

G N  GC
24
1 p
.
Proof. Differentiating G when t  t p by t in equation (22), we have
G
G
p
 ( 1  p ) N  ( G N  GC ) .
t
t
t
(23)
The first term in the right hand of (23) reflects the positive revenue effect of changing
in G N , meanwhile the second term is the negative cooperation effect of changing in p.
Because cooperation is always beneficial,
G N  GC ,t  ( 0 ,t p ).
We also have,
whent  0,
G ,

 N
G

GC ,
when t  t p .
G N / t G N  GC
, from (26) we see that G / t  0 . This means

p / t
1 p
that increases in t near 0 from the right hand would have positive effects on G.
When t  0  , if
On the other hand, when t  t p , we have,
G
p
 ( GN  GC )  0.
t
t
Therefore, there would be some value
t*  ( 0 ,t p )
such that
G / t  0 and
G / t changes the sign from positive to negative when t passes across t * , which is
called the optimal time that maximizes the expected government revenue. Because we
assume that GN ( t ) is concave and p(t) is linear or convex, the first term in the right
hand of (23) is decreasing, meanwhile the second term is non decreasing, therefore, the
value of t * is unique (point E in Figure 4).
We can also describe the evolution of the expected government revenue as that in Figure
5.19 We can see that when the probability of cooperation is between zero and one, t  t p ,
the evolution of G would depend on the evolution of G N and ( G N  GC ) p( t ) . Because
G N and G N  GC have the same sharp of increasing in t, when t  0  if the condition
in the proposition is satisfied, the slope of G N would be higher than that of
From now, we assume that t p  t N . The case of t p  t N can be similarly described without
significant effects on the results.
19
25
( G N  GC ) p( t ) . On the other hand, when t  t p , the slope of ( G N  GC ) p( t ) would
be higher than that of G N . Therefore, there would be some point that the slope of these
curves is equal ( G / t  0 ). Because GN ( t ) is concave and p(t) is linear or convex, there
would be a unique point E at which the slopes of G N and ( G N  GC ) p( t ) are equal.
The locus of the expected government revenue would start from GN ( 0 ) , reach the
maximum level at E ( t  t * ), and then, reduce to the value of GC from point F ( t  t p ).
When t  t p , the government revenue remains constant at GC because the probability
of cooperation is one.
Figure 4: Determination and uniqueness of the optimal time in Proposition 3.
( GN  GC )
p
t
E
(1 p )
GN
t
tp
t*
t
G
G
p
 ( 1  p ) N  ( GN  GC )
t
t
t
In Proposition 3, there would be the cases when the conditions that GN ( t ) is concave
and p(t) is linear or convex are violated. In these cases, the uniqueness of the optimal
level of time would be questioned. There might be several points/regions of t that make
G / t  0 and the sign of G / t changes from positive to negative. They called the
locally optimal points/regions. In this case, the globally optimal point/region would be
chosen between these locally optimal points/regions where the expected government
revenue is maximized.
26
Figure 5: The evolution of the expected government revenue in Proposition 3.
GN
GN
E
G
G No
GN  GC
F
GC
G
( G N  GC ) p( t )
0
t*
tp
tN
t
t
When the condition concerning t at near 0 from the right hand in Proposition 3 is not
satisfied, i.e., at t  0  ,
G N / t G N  GC

,
p / t
1 p
there might be two following possibilities:
20
(i) The gap between G N and ( G N  GC ) p( t ) is non-increasing in t  ( 0 ,t p ) . That
means,
It should be noted that this possibility happens only when p(t) is relatively concave. In fact,
this function is rarely relatively concave. However, we discuss here to ensure the
comprehensiveness of the model.
20
27
G N / t G N  GC
G

,t  ( 0 ,t p ) 
 0 ,t  ( 0 ,t p ).
p / t
1 p
t
In this case, the expected government revenue would be decreased from G N to GC
when t increases from 0 to t p . Hence, in this case, the higher the frequency of rotation,
the more the government revenue could be collected. Even in this case, it could be
possible to find the optimal level of t by two possible methods. The first method is to set
up a threshold for p(t), as follows,
0 , if t  [0,tth ],


p( t )   g( t ), if t  [0,t p ],

1, if t  t p ,

where t th is the threshold level from which there would be a possibility for cooperation.
On the other hand, the second method is to add some cost for rotation at the beginning
periods for new jobs. It is easy to see that for the first case, t th is the optimal level of t;
meanwhile, in the second case, the optimal time would be determined when the
concerned cost of rotation become less than the expected loss in revenue due to the
possibility of cooperation.
(ii) The gap between G N and ( G N  GC ) p( t ) is increasing in at some ranges in
( 0 ,t p ) . This case is similar to the case we considered above that the conditions of
GN ( t ) is concave and p(t) is linear or convex in Proposition 3 are violated. In this case,
there might be several points/regions of t that make G / t  0 and G / t changes the
sign from positive to negative. They are the locally optimal points/regions. In this case,
the globally optimal point/region would be chosen between these locally optimal
points/regions where the expected government revenue is maximized.
Case 2: Cooperation is only beneficial when t reaches a certain level
( t  tC  [ 0 ,t p ) )
In this case, the expected government revenue is as follows,
G N ,
when t  tC ,


G  ( 1  p( t ))G N  p( t )GC  G N  ( G N  GC ) p( t ), when tC  t  t p ,

when t  t p .
GC ,
We have the following propositions.
28
(24)
Proposition 4. If cooperation is only beneficial when t is large enough ( t  t C , t C  [ 0 ,t p ) ),
GN ( t ) is concave, and p(t) is convex or linear, there always exists a unique value of
t  (tC ,t p ) that maximizes the government revenue. This optimal value of t is
determined where
G N / t
p / t

G N  GC
1 p
.
Proof. From equation (24), at two polarized point t C , t p ,
Gt tC  G N  ( G N  GC ) p( t )
Gt t p  G N  ( G N  GC ) p( t )
t tC
t t p
 GC
 GC
Because p( t )  ( 0 ,1 ) when t  ( tC ,t p ) , we have,
G  GN  ( GN  GC ) p( t )  GN  ( GN  GC )  GC .
On the other hand, we assume that GN ( t ) is concave and p(t) is convex or linear.
Therefore, similarly to the case stated in Proposition 3, there would be a unique value of
t* at which G / t  0 , or,
G N / t G N  GC

,
p / t
1 p
and G / t changes the sign from positive to negative when t crosses t*.
In this case, the expected government revenue can be presented in Figure 5. Looking at
this figure, we see that the curve ( G N  GC ) p( t ) is always below the curve G N  GC .
Therefore, the expected government revenue would be initially increased and then
decreased in the determinant region [ tC ,t p ) . Because GN ( t ) is concave and p(t) is
convex or linear p(t) is convex or linear, the expected government revenue G would be
uniquely maximized at point E ( t  t * ) where G / t  0 , where the slope of the curve
( G N  GC ) p( t ) is equal to that of the curve G N (also equal to the slope of the curve
G N  GC ). When t  [ 0 ,tC ] , we have G  GN , the locus G is that of G N . At t  tC , it
reaches point A, and then, goes to point E ( t  t * ) where the expected government
revenue is maximized. After that, it is gradually downward to point B ( t  t p ), where the
government revenue is GC . Beyond this point, the expected government revenue
remains at GC because the probability of cooperation becomes unit (the taxpayer and
the inspector cooperate surely).
29
Figure 5: The evolution of the expected government revenue in Proposition 4.
GN
GN
E
A
B
G
GC
G No
GN  GC
0
tC
( G N  GC ) p( t )
t*
tp
tN
t
t
It could be easy to see that the optimal level of t is always existed in this case
(cooperation is only beneficial when t is large enough). However, regarding to the
uniqueness of the optimal time, there would be several cases. Beside the case in
Proposition 4, there would also be the cases at which the conditions that GN ( t ) is
concave and p(t) is convex or linear are violated. The uniqueness of the optional time is
dependent on the sharp of these functions. Similarly to the cases regarded above, there
might be several locally optimal points/regions of t that make G / t  0 and the sign of
G / t changes from positive to negative. In this case, the globally optimal point/region
would be chosen between these locally optimal points/regions where the expected
government revenue is maximized.
Looking overall, we can see that, in general, job rotation in tax administration would
have a positive effect on the expected government revenue. The optimal time for
rotating is dependent on the parameters of the model. Specifically, it would be not
difficult to see that it depends on the functions of the probability of cooperation, p( t ) ,
30
and the inspector’s probability of finding out the real income,  ( t ) . Regarding to the
former, when this function is highly convex, the optimal time for job rotation would be
lengthened. By contrast, when it becomes relatively concave, the optimal time would be
shortened. By other words, the optimal length of time would be dependent on the slope
of this function, the more the flatness of the function at the initial time, the higher the
optimal length of time is. For a given sharp of the possibility of finding out the real
income of the inspector, if the probability of cooperation is low at the beginning time, the
expected government revenue will increase gradually and reach its optimal level at a
relatively large t.
On the other hand, the function of probability of finding out the real income  ( t ) is
also play an important role in determining the optimal time that the inspector should do
his job with the same taxpayer. The higher the slope of the curve at the beginning time,
the shorter the optimal time would be. In this case, the inspector would be able to find
the real income at the beginning stage at a high probability. Therefore, the expected
government revenue would be increased rapidly at the beginning stage but with a
decreasing speed, and early reaches its optimal level.
IV. Discussions
countries
on
the
framework
for
developing
Before considering the framework for applying the job rotation system in tax
administration in the developing countries, we need to consider the job rotation scheme
in the Japanese public finance’s administration system as a unique successful example
in the world. Similarly to almost other Japanese government agencies, job rotations in
the public finance system, including the tax administration system, have been
implemented regularly. The basic time for rotation is about two years. There are usually
two times for rotating officials and staffs (the director class and under) in April and July
every year. The classes of higher-ranking officials are also subject to this rotation
scheme, although there might be different in frequencies. The rotation system has also
been designed to ensure the continuousness of works such that there are always
newcomers and experienced people at the offices, relatively. The jobs/works before and
after rotation might be in the same field, but it is not a rule.
It should be noted that the administrative system in Japan focus on training public
servants in their practice works. After several times of rotation, they are believed to
perceive a vast of knowledge and experiences concerning the fields of their agencies.
31
There is also a distinguished feature that the rotation system usually makes the rotated
people moving following upwardly oscillated orbits, from the bottom to the top of the
organization’s management system. Although it seems that there is no relation between
job rotation and promotion, looking at the whole working-life of a public servant, it
would be easy to see the relation between them, not only in positions/ranks, but also the
salary levels.
For a public official who passed the Type I of National Examination for public servants
and work in government agencies, so-called type I officers, he usually have the working
life as follows.21
Stage 1: Working at some divisions/department in the agency for around two years, and
then, promoted to the section-chief level. In this stage, he is to work at the office from a
position as a staff from the beginning to gain various experiences, including the mental
aspect, at the lowest level in the administration system. Therefore, it would be easy for
him to understand how the works are processed when he promotes to manager
positions.
Stage 2: Going to abroad for studying in two years, rotated in the agency, or going to an
agency’s local branch. In this period, he is usually sent to study in a master course in
public administration or concerned fields. In case of going to an agency’s local branch, he
is supposed to learn comprehensively working experiences in practice at the local level.
Stage 3: Going back to the same agency or going to other government agency, and being
promoted to the rank of deputy director. In case of going to other government agency, he
would be back to the initial agency after around two years for learning out-side
experienced and creating connections between agencies. In this stage, he is rotated
every two-year period in different divisions/ departments in the agency and faced
various tasks concerning the agency’s fields.
Stage 4: Promoted to the rank of director and rotated within the same agency. After
around ten years of working as a deputy director in stage 3, he is promoted to the rank
of director. He is also subject to rotation between different divisions in the agency at a
frequency of around two years.
Stage 5: The period before retirement. As a director, after several times of rotations, he
For the case of type II and type III officers who passed the Types II and III of National
Examination for public servants, they are also usually rotated to different jobs in the same or
different offices in the agency, and also subject to promotion up to the rank of deputy director.
21
32
would be promoted to higher positions/ranks, or after some years of working, retired to
work at some public/private companies as a member of the board of directors or as a
senior advisor to the board. There is also the possibility that he would go a local finance
office to resume the position as the general director.
Therefore, the typical public servant in Japan is generally a generalist, not a specialist.
In recent years there have been increasing trends in job rotations between government
agencies and between public and private sector. The Japanese government intends to
make their administration system more flexible and efficient in a close relation with the
public. However, with the system of “top-down” administrative orders, it would be very
difficult for creating a flexible system, at least in the near future. There have been
recently some issues emerging because of fast changes in the socio-economic conditions
in Japan. First, as a culture of working, the system of job rotation seems to be changed
little in responding to rapid changes in the environment. Under the new context of
socio-economic conditions and the process of globalization, the abortion or revisions of
the rotation system, especially in the frequency aspect, might be appropriate in some
fields/sectors; meanwhile it is necessary to enhance or introduce in others. It is very
difficult to set up a general rule for rotation, as in present system; there should be
discretions over the rule. The job rotation system needs to be applied flexibly
case-by-case. On the other hand, the currently seniority wage system based on the
seniority of ages also needs to be changed towards or mixed with the system of wage
based on the working performances/productivities. Therefore, the topic of job rotation
for each field/sector should be carefully checked and revised with relevant reforms in the
wage system. This is also an important issue for the process of stabilization,
liberalization and development of the Japanese labor market.22
For tax administration in the developing countries,23 it is not easy to apply the job
rotation system such that the system is immediately well functioned like the Japanese
case, although we know that it might play an important role in reducing tax evasion and
corruption. As we noted above, one of the major disadvantages of job rotation is the
difficulty in application. Based on the socio-economic conditions of developing countries,
there would be three main difficulties. First, the job rotation system would face strong
oppositions of tax officers and taxpayers and increases in costs of tax compliances.
22
Also see Kuroda (2001).
23
Also see Das-Guppta et al. (1999), WB (2000), Gill (2000), Asher (2001).
33
Regarding to tax officers, the job rotation would reduce income from corruption and cut
off the deep and preferential relations with the taxpayers. Especially, for the old
generation, they would protest the system even stronger because their conservative
manners. There would also be social and welfare issues for the tax officers who are
rotated into the jobs they do not like or they are not able to do well. For the taxpayers,
they might also oppose the system because, beside the possibility of increases in the tax
liability, the job rotation also means that the cost of compliance increases relatively
because they face new tax officers more often and need to spend time and other
concerned costs to meet their requests.
Second, there might be distortions in the management system and organizational
aspects. In this aspect, there would be three main problems: (i) the allocation issue: the
work of the personnel department in charge of rotating is likely to be biased. The rule of
“the right person in the right place” would be easily violated, especially in the
socio-economic conditions of the developing countries where rules seem less affective
than discretions; (ii), the job evaluation system and concerning policies such as the wage
policy and promotion schemes would be significantly affected; and (iii), the possibility of
cooperation between the current officers and the next officers in charge of the same
taxpayers. If they cooperate, there would be the issue of “new bottle, old wine”, and then,
the effect of job rotation would be less meaning in the aspect of protecting tax evasion
and corruption.
Third, it should be noted that nowhere in the world has such a wonderful socioeconomic conditions like Japan so that it would be easy to introduce the system of job
rotation. The social aspects concerning the rotation, such as culture of working, customs,
routines, and especially, the people’s attitudes to the job rotation system would be rather
stiffened. It seems not easy to change these aspects if there are not relevant measures
and breakthrough explanations.
Although facing these difficulties, job rotation is believably indispensably necessary in
tax administration in the developing countries because tax evasion and corruption has
been becoming more and more serious in these countries. The introduction of the job
rotation system would be beneficial for the economy as a whole if there is a relevant and
feasibility framework in combination with a process of preparing necessary conditions
for successfully introducing the system. Regarding to the feasible framework, there
would be following issues that should be seriously considered.
(i) Which fields of works/jobs/regions should be rotated? It should be noted that job
34
rotation is usually at the cost of specialization; therefore, at the beginning stage job
rotation might be only suitable in the works/jobs where the level of corruption is
relatively high or the jobs require less levels of specialization. The decision on the scope
and regions for applying the system is also needed to consider carefully because it would
be very difficult to send some tax officers living in the urban areas to do some jobs at the
remote mountain areas. Rotating people within the local network would be relevant.
(ii) Who is subject to rotations? This is very important because it is impossible to rotate
everyone in tax administration at the beginning. It is also very important when
regarding to the aspect of the efficiency of rotations in reducing corruption. At the initial
stage, it would be advisable to rotate only tax officers who are directly in charge of
investigating or determining the reported income of the taxpayers because they are
believably the most powerful and corruptible.
(iii) How often to rotate? This is an extremely difficult question at the initial stage of
application. The optimal time would be dependent on the jobs’ characters, objectives,
and socio-economic environments. However, the time should not be too short that would
cause high costs and make the works of rotated people less effective. The frequency
should be also not too long such that the possibility of cooperation between taxpayers
and tax officers become relatively high.
It would also be advisable for the government that the rotation system should be applied
in some pilot programs with the approach of “trying, seeing, and revising”. One the
system is successful in the level of these pilot programs; it would be easy to multiple
these positive effects to expand the application of the job rotation to the whole tax
administration system as well as other relevant fields/sectors of the economy.
Regarding to the necessary conditions for applying the job rotation system, it is
necessary to prepare all concerned issues carefully, especially the systems of job
evaluation, wage, and promotion, the program of training concerned officials, and the
attitude of the government in the process of introducing the system. First, regarding to
the systems of job evaluation, wage, and promotion, it is necessary to set up new
regulations concerning job rotations, especially schemes of penalties and incentives.
Without a relevant system of job evaluation, the efficiency of the job rotation system
would be not precisely assessed so that necessary revisions and adjustments would not
be implemented. On the other hand, the issues of wage and promotion are also very
important, which should be considered comprehensively along with the job evaluation
system. Second, training officials to meet the requirements of job rotations is also very
35
important. Because the system is rather new for developing countries, the concerned
people in tax administration need to know well about the nature of the system and
study both work-related knowledge and skills and mental aspects. This also an effective
measure to avoid shocks to the rotated people because they used to do their jobs in very
narrow fields. With the rotation system, they need to understand broader fields of works,
which need a relevant system of training for rotation.
Finally, a strong stance of the government towards the job rotation system is very
important. As presented above, the system would be strongly opposed by both the
taxpayers and the tax officers, costly, and rather strange to the public at the beginning
stage. Therefore, it would be not implemented successfully without a strong leadership
of the government. Beside their strong stance, the government also needs to make the
system clearly to the public, especially to explain its important effect on reducing
corruption. Because in the developing countries, most of the people are alarmed by the
popularity of corruption, one they understand the positive effect of the rotation system
in reducing corruption, they would support the government to pursue the objective of
introducing the job rotation in public administration in general and tax administration
in particularly.24
Besides, another important condition is to enhance internal control, which is considered
as a foundation for enhancing accountability in the administration system. The
framework of establishing and maintaining effective internal control would be very
important for successfully introducing the system of job rotation. There is also another
aspect should be noted. The job rotation system would change the ways of working and
thinking of jobs and careers of public servants. It would also affect the working
environment, relation and culture. Therefore, it would take time to introduce and adjust.
The introduction of the system would be only successful when its advantages and
positive effects on the economy finally recognized by a large number of the people. When
introducing successfully in the public sector, the prospect for the private sector to apply
the job system would be also opened. For the small- and medium enterprises, it might be
not necessary to introduce the system. However, for the large firms and organizations,
the system of job rotation would be necessary and important due to its noted advantages,
especially positive effects on career development, productivity, flexibility, and reductions
in working stresses, among others.
24
Also see Kindra and Stapenhurst (1998).
36
V.
Conclusion
In the developing world nowadays, preventing and protecting tax evasion and
corruption in the tax administration have been become one of the most important tasks
for both policy-makers and economists. Based on the stylized facts of these economies,
we analyzed the effect of job rotation in reducing corruption in a simple model of tax
compliance for developing countries with the assumption that the tax inspector’s
probability of finding out tax evasion and the probability of cooperation between the
taxpayer and the inspector are functions of the time that the inspector works with the
same taxpayer. In this framework, the time would have two distinct effects on tax
compliance. On the one hand, the time would make the expected government revenue
increasing because the possibility of finding out tax evasion increases along with the
time. On the other hand, the probability of cooperation between the taxpayer and the
inspector also increase as the time increases, which would reduce the expected
government revenue. The solution of this trade-off relation would be the optimal level of
the time where the positive revenue effect is offset by the negative cooperation effect.
This theoretical model clearly illustrates the superiority of job rotation to reduce tax
evasion and corruption in tax administration in the developing countries. The idea of
considering the job rotation system in the framework of tax evasion and corruption is
the distinguished feature of the theoretical model developed in this paper because job
rotation and tax evasion corruption have been usually considered as two separate topics
in the recent economic literature. Job rotation is usually considered in the context of
industrial organization at the firm level; the relation of job rotation and corruption has
been rarely discussed. On the other hand, in the literature on tax compliance, most of
studies concentrated on analyzing aspects of tax burden, penalties, and incentives.
It should also be noted that the theoretical framework in this paper might be widely
extended in the manner that introductions of working efforts of tax inspectors, honest
and dishonest taxpayers and inspectors, and changes in assumptions and parameters
would have no significant effects on the results and arguments of the model – the job
rotation system would still have a positive effect in reducing tax evasion and corruption,
especially in the condition of much biased and distorted information and difficulties in
socio economic conditions in the developing countries. In this paper, we restrained
analyses in the case that job rotation would reduce the inspector’s probability of finding
out the real income. However, when this restraint is lifted, it is even more beneficial for
the government to introduce the system in tax administration. In the field of tax
37
investigations, rob rotation might also enhance the working proficiency of the inspectors
in some cases. Among others, one of the most possible cases is that there would be
heterogeneous taxpayers with different types of income in an economy with asymmetric
information. The taxpayers’ structure of income is changed rapidly such that a rotated
inspector with a vast of experiences concerning investigations of these types of income
would do his job better than a non-rotated inspector who are specialized in specific
taxpayers.
We also discussed the framework for applying the job rotation system in tax
administration in the developing countries. It is clear that it would be not easy to apply
the system in the developing countries because of difficulties and obstacles in the
socio-economic conditions in these countries, although we know its positive effect in
reducing tax evasion and corruption. The job rotation system in the Japanese
administration is very important for the developing countries when considering the
system to introduce because it has been quite successful and stable. However, the
socio-economic conditions in the developing countries are much different from that in
Japan. Therefore, it is necessary to make careful considerations on possible difficulties
in introducing the system, build the feasibly framework, and prepare necessary
conditions for the process of implementation in order to make the job rotation system
feasible and efficient in tax administration in these countries.
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