Question

The tax authority of a country is trying to deal with companies not paying their taxes and encourage them to do so. A typical small company owes 20,000 TL in taxes per year. The tax authority came up with the following carrot-and-stick approach: a company may pay its taxes early, based on an estimate of its profit for the year and get a 20% discount from the tax amount. About 25% of companies choose to pay early. For the companies that do not pay early, the tax authority performs random audits. 40% of companies get audited by the tax authority and pay the taxes they owe plus a penalty of 10% on the tax amount. Each audit costs 5,000 TL. The remaining small-size companies end up not paying taxes in the current year. What is the tax authority’s expected cash flow per company in a given year?

Answer 1