Using actual probabilities of audit and penalty rates, the return on evasion is 91–98%. So why do not most of us evade? Existing analysis, based on expected utility theory (EUT) is unable to explain this. Furthermore, and contrary to intuition and the bulk of evidence, EUT predicts that evasion should be decreasing in the tax rate (Yitzhaki puzzle). We apply Tversky and Kahneman’s [Tversky, A., Kahneman, D., 1992. Advances in prospect theory: cumulative representation of uncertainty. Journal of Risk and Uncertainty 5, 297–323] cumulative prospect theory to tax evasion. We show that prospect theory provides a much more satisfactory account of tax evasion including an explanation of the Yitzhaki puzzle. This also provides independent confirmation of prospect theory.
The economics-of-crime approach usually ignores the emotional cost and benefit of cheating. In this paper, we investigate the relationships between emotions, deception, and rational decision-making by means of an experiment on tax evasion. Emotions are measured by skin conductance responses and self-reports. We show that the intensity of anticipated and anticipatory emotions before reporting income positively correlates with both the decision to cheat and the proportion of evaded income. The experienced emotional arousal after an audit increases with the monetary sanctions and the arousal is even stronger when the evader's picture is publicly displayed. We also find that the risk of a public exposure of deception deters evasion whereas the amount of fines encourages evasion. These results suggest that an audit policy that strengthens the emotional dimension of cheating favors compliance.
Using country-level data from 2003–2014, we examine the association between auditing level (measured as number of verification actions taken by tax authorities per 100 taxpayers in each country) and tax compliance (measured as business executives’ perception of tax evasion). Our hypothesis is that compliance increases until a certain auditing level is reached, and decreases beyond that level (i.e., an elevated auditing level backfires). In line with our expectation, the results of a series of tests indicate that there is a U-shaped association between auditing and tax evasion. We discuss how a potential backfiring effect may depend on the extent to which compliance is voluntary.
Tax evasion is a pervasive problem in many countries. In particular, some developing countries do not collect even half of what they would if taxpayers complied with the written letter of the law. The academic literature has not been oblivious to the need to explain why people pay (or do not pay) taxes. However, the empirical literature has not yet reached consensus. This paper reports the results of a large field experiment that tried to affect compliance by influencing property tax taxpayers’ beliefs regarding the levels of enforcement, reciprocity, and peer-effects of the tax system in a municipality in Argentina. Results indicate that those taxpayers that received the deterrence message have a higher probability (almost 5 percentage points) to comply than the taxpayers in the control group. No average effects are found for the other two treatments. However, this average effects masks important results. After receiving the reciprocity and the peer-effects messages, the probability of compliance increased for some taxpayers but it decreased for others according to their underlying distribution of beliefs. The evidence in this paper advances the state of knowledge, may help to reconcile some of the results in the literature, and provides the basis for advancing policies and research on tax compliance in developing countries.
Since the 1950s ( ) it is well known that behavioral aspects have an influence on tax evasion or tax compliance. In particular, interactions among the various entities involved in the taxation process (e.g. taxpayers, law makers, tax practitioners, tax authorities, etc.), and the dynamics that these interactions may generate, seem to play an important role for the actual level of tax compliance. However, the mainstream neoclassical approach to tax evasion ( ) cannot account for such interactions and dynamics. Therefore, during the last two decades new approaches (e.g. lab experiments, agent-based modeling, etc.) have been developed with a view to model how behavioral dynamics may foster or prevent tax evasion. In addition, empirical evidence has been generated that supports a role for such interaction dynamics. In this contribution we survey the main developments in this research area and provide some suggestions for further research.
This article presents results from survey experiments investigating conditions under which Britons are willing to pay taxes on polluting activities. People are no more willing if revenues are hypothecated for spending on environmental protection, while making such taxes more relevant to people - by naming petrol and electricity as products to which they will apply - has a modestly negative effect. Public willingness increases sharply if people are told that new environmental taxes would be offset by cuts to other taxes, but political distrust appears to undermine much of this effect. Previous studies have argued that political trust shapes public opinion with respect to environmental and many other policies. But this article provides the first experimental evidence suggesting that the relationship is causal, at least for one specific facet: cynicism about public officials' honesty and integrity. The results suggest a need to make confidence in the trustworthiness of public officials and their promises more central to conceptualizations of political trust.
Voluntary compliance is an important aspect of strong tax regimes, but there is limited understanding of how social norms favoring compliance emerge. Using novel data from urban Nigeria, where tax enforcement is weak, this article shows that individuals with a positive experience of state services delivery are more likely to express belief in an unconditioned citizen obligation to pay tax. In addition to support for this fiscal exchange mechanism, social context is consequential. Where individuals have access to community-provided goods, which may substitute for effective state services provision, they are less likely to adopt pro-compliance norms. Finally, the article shows that norm adoption increases tax payment. These findings have broad implications for literatures on state formation, taxation and public goods provision.
Policies to reduce aggressive tax avoidance are increasingly being implemented or discussed in many countries around the world. Tax authorities hope that such policies will generate new tax revenue by increasing overall tax compliance. We present an experimental design to investigate the effect of a stylized anti-avoidance tax policy on tax compliance behavior. We highlight that anti-avoidance tax policies that reduce tax avoidance can also induce an increase in tax evasion (“substitution effect”), which limits the additional tax revenue these policies will generate. We show that the degree of substitution depends crucially on behavioral factors such as tax morale. Policymakers therefore also need to consider behavioral features while designing such policies and estimating their potential effects.