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.

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

See Global Corruption Report 2003 (Transparency International (2003). Also see
Bardhan (1997), Rose-Ackerman (1997), Hellman et al. (2000).

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 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 inspectors 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

Also Campion and Cheraskin (1994).

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.

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.

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

A1
A2

X1

B1

X2
A3

Works

B2
X3

Y2
B3

Y1

Y3

Narrow definition

Narrow definition

Wide definition
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,

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 pre- training for the unemployed to work as substitutes (See Lehtinen and
Lehtinen (2001)).

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)). 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
5

Also see Buchanan (1974) and Jones (1986).

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 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
6

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.
7

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.

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.

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 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 socioeconomic 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.

8

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)
9

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.

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 Mookherjee and
Pngs (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

10

Also see Shleifer and Wishny (1993), Wane (2002), Acconcia et al. (2003)

11

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.

10

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 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
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)).
13

Also see Kaufman (1997), Gill (2000), Asher (2001), Fisman, R., and Svensson (2002)

11

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.

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.

12

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 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

13

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 socioeconomic 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,

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
14

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

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 inspectors
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

15

There would be also the case of considering the inspectors effort; however, we
assume that it is given in order to concentrate on analyzing the times effects. The case
concerning the inspectors effort can be analyzed by introducing a variable of inspectors
effort in this function. However, the results of the model would not be changed
significantly.

15

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,

p( t ) [ 0,1], p' 0, when t [0,t p ],

1,

when t t p .

(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.

16

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 two limits, the results of the model would not be changed.
17

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.

16

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.

Figure 1: The game in tax administration

1-p

No cooperation

Cooperation

rN

rC

rN

rC
U CNA ,VCNA

NA
,V NN

A
U NN

A
,V NN

U CA ,VCA

rN
NA
U NN

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 inspectors 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.

17

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 taxpayers reported income), in the case of not
being audited, because the probability of finding out the real income is ( t ) ,
the inspectors 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,

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,

V N ( 1 )V NNA V NNA 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 taxpayers

expected income would be as follows,

NA
A
U N ( 1 )U N
U N

( 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 ,

18

(6)

where PN 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
T
maximization problem for the taxpayer would be MaxrU N Maxr PN . From

(5) and (6), we have,

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,

rN , where

r*

fT
( 1 )( 1 )
1 2
fT '
, when
,
r
( 1 )
2( 1 )

(7)

when .

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 , )

19

rN

1 2
1

when is rather small. Then we have the rule

2( 1 ) 2
of 1/2 as stated in the following proposition.

In equation (7),

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 inspectors 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 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, when t t ,
N
rN ' f ''
t T
0,
when t t N ,

(8)

1 2
where t N is determined by ( t N ) 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
20


rN ( t 2 )

rN ( t )

rN ( t1 )
rN ( 0 )

t1

t2

tN

From (8), at the optimum choice of rN we have,

U N
t

( 1 ) [( rN )' ( 1 )rN ' ] [( 1 ) ] fT ' rN ' ( 1 ) fT '

( 1 )[( rN ) fT ]' 0,

0 ,

when t t N ,

(9a)

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 inspectors 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 inspectors expected income, we see
that it is dependent on the time, t, and the taxpayers reported income, as
regarded above. Then, when the reported income is rN , from (4), (7), and (8),
we have,

21

VN [( 1 )rN ' ( rN )' ] [ f I' ( 1 ) f I ' rN ' ] 0, when t t N ,

(10)
t 0,
when t t N .

From equation (10), we see that when t t N , the inspectors 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 inspectors 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 ) ] fT ( ,r )

GN (U N U N ) w [( 1 )r ] ( 1 ) f I ( ,r ), when t t N , (11)

w ,
when t t N .
The evolution of the expected government revenue is then,

U V
N N
GN t t , when t tN ,

t
0,
when t tN .

(12)

When t t N , we assume that,

G N
[( 1 )( rN ) ( 1 ) f T f I ]' ( 1 )( f I ' )rN ' 0.
t

22

(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 taxpayers 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 inspectors 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 ) [ f T ( , r ) f I ( , r )] w r .

(16)

Then we have the optimal value of reported income in case of cooperation,

r rC where f T ' ( 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.

23

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 ) f T ( , 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 V N )

.
2
2

(21)

Generally, the level of bribe is considered as the solution of a Nash bargaining

problem 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
18

Also see Choo and Krep (1987), Hindriks et al. (1999).

24

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 V N ) ( U C VC ) ( U N V N ) 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 V N
G N
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 inspectors probability of
discovering the real income is relatively low at the initial period. When t
increases, the inspectors probability of discovering the taxpayers 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 G N ( t p ) GC so that
there would always be the possibility of cooperation.

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

25

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 N p( t )G G N ( G N G ) p( t ), when t t p ,
C
C

GC ,

(22)

when t t p .

Looking at equations (22), when t t p the change of G would depend on the

slope of p( t ) and G N ( t ) . Based on the evolution of these functions, we have
the following proposition.
Proposition 3. If cooperation is always beneficial, G N ( 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
1 p

Proof. Differentiating G when t t p by t in equation (22), we have

G N
G
p
(1 p )
( 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

26

of changing in p. Because cooperation is always beneficial,

G N GC ,t ( 0 ,t p ).

We also have,

G N ,

when t 0,

GC ,

when t t p .

G N / t G N GC

, from (26) we see that G / t 0 . This

p / t
1 p
means 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
( G N 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 G N ( 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 ( 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

G N ( 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.

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

27

The locus of the expected government revenue would start from G N ( 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.

( G N GC )

p
t

(1 p )

t*

G N
t

tp

G N
G
p
(1 p )
( G N GC )
t
t
t

In Proposition 3, there would be the cases when the conditions that G N ( 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.
Figure 5: The evolution of the expected government revenue in
Proposition 3.

28

GN

GN

G No

G N GC

F
GC

( G N GC ) p( t )

t*

tp

tN

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,

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.

20

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.

29

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 G N ( 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 t C [ 0 ,t p ) )
In this case, the expected government revenue is as follows,

GN ,

when t tC ,

G ( 1 p( t ))GN p( t )GC GN ( GN GC ) p( t ), when tC t t p , (24)

when t t p .
GC ,
We have the following propositions.
Proposition 4. If cooperation is only beneficial when t is large enough (

30

t t C , t C [ 0 , t p ) ), G N ( t ) is concave, and p(t) is convex or linear, there always

exists a unique value of t (t C , 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 ( t C ,t p ) , we have,

G G N ( G N GC ) p( t ) G N ( G N GC ) GC .

On the other hand, we assume that G N ( 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 [ t C ,t p ) . Because
G N ( 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 G N , the locus G is that of G N . At t t C , 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).
Figure 5: The evolution of the expected government revenue in
Proposition 4.

31

GN

GN

E
A

GC

G No

GN GC

tC

( G N GC ) p( t )

t*

tp

tN

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
G N ( 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 ) , and the inspectors probability of finding out the real income,

32

 ( 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.

I.

Discussions
on
the
developing countries

framework

for

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 finances 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

33

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. 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 organizations 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 agencys 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 agencys 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 agencys
fields.
Stage 4: Promoted to the rank of director and rotated within the same agency.
21

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.

34

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 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

22

Also see Kuroda (2001).

35

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 socioeconomic 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. 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 peoples attitudes to the job
23

Also see Das-Guppta et al. (1999), WB (2000), Gill (2000), Asher (2001).

36

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 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

37

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 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

38

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.

2 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 inspectors 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
24

Also see Kindra and Stapenhurst (1998).

39

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 inspectors 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 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

40

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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