TAX EVASION AND MONOPOLY OUTPUT DECISIONS - NOTE

This note readdresses the issue of monopoly profit tar evasion and its output decisions recently reexamined in this journal by Wang (1990) u nder the assumption that the probability of detection and the penalty rate increase with the amount of understated profit. The note shows th at contrary to Wang's allegation, the separability of the monopolist's output decision from its tax evasion behavior (obtained by Wang and C onant, 1988, under the assumption that the probability of detection an d the penalty rate are exogenously fixed) still holds under his more r ealistic assumptions. Consequently, profit tares are still neutral wit h respect to the monopolist's profit-maximizing output.