Tax evasion and monopoly output decisions: Note

This note readdresses the issue of monopoly profit tax evasion and its output decisions recently reexamined in this journal by Wang (1990) under the assumption that the probability of detection and the penalty rate increase with the amount of understated profit. The note shows that contrary to Wang's allegation, the separability of the monopolist's output decision from its tax evasion behavior (obtained by Wang and Conant, 1988, under the assumption that the probability of detection and the penalty rate are exogenously fixed) still holds under his more realistic assumptions. Consequently, profit taxes are still neutral with respect to the monopolist's profit-maximizing output.