When the state does not play dice: aggressive audit strategies foster tax compliance

We experimentally test the effect of aggressive audit strategies on tax compliance. Taxpayers first go through a phase of audits managed by a human tax agent who is requested to follow a rule imposed by a fair random device. However, the tax agent can freely decide to break the rule and over-inspect. Afterward, taxpayers are exposed to a genuinely random audit process governed by an algorithm, which makes compliance a strategically dominated option. We find that taxpayers are generally over-inspected by the human tax agents and react to this with nearly full compliance. Our main result is that these high levels of compliance also persist when controls are implemented by the algorithm. This suggests that tax authorities can use aggressive audit strategies to raise and sustain tax compliance.

[1]  L. Mittone.  Dynamic behaviour in tax evasion: An experimental approach , 2006 .

[2]  Sebastian Kube,et al.  The Interaction of Legal and Social Norm Enforcement , 2010, SSRN Electronic Journal.

[3]  F. Guala.  The Methodology of Experimental Economics: Bibliography , 2005 .

[4]  Sanjiv Erat,et al.  White lies , 2010, Manag. Sci..

[5]  J. Alm.  Measuring, explaining, and controlling tax evasion: lessons from theory, experiments, and field studies , 2012 .

[6]  M. Johannesson,et al.  Promises, Threats and Fairness , 2004 .

[7]  Martin Strobel,et al.  Inequality Aversion, Efficiency, and Maximin Preferences in Simple Distribution Experiments , 2002 .

[8]  U. Fischbacher,et al.  Are People Conditionally Cooperative? Evidence from a Public Goods Experiment , 2001 .

[9]  L. Sherman.  Police Crackdowns: Initial and Residual Deterrence , 1990, Crime and Justice.

[10]  Rupert Sausgruber,et al.  TESTING ENFORCEMENT STRATEGIES IN THE FIELD: THREAT, MORAL APPEAL AND SOCIAL INFORMATION , 2013 .

[11]  J. Alm,et al.  Using Laboratory Experiments in Public Economics , 2007, National Tax Journal.

[12]  L. Mittone.  Subjective versus objective probability: results from seven experiments on fiscal evasion , 1997 .

[13]  Agnar Sandmo,et al.  Income tax evasion: a theoretical analysis , 1972 .

[14]  Regulatory performance of audit tournaments and compliance observability , 2016 .

[15]  T. N. Srinivasan,et al.  Tax evasion: A model , 1973 .

[16]  N. Jacquemet,et al.  Dynamic effects of enforcement on cooperation , 2018, Proceedings of the National Academy of Sciences.

[17]  E. Fehr,et al.  Cooperation and Punishment in Public Goods Experiments , 1999, SSRN Electronic Journal.

[18]  J. Abeler,et al.  Preferences for Truth-Telling , 2016, Econometrica.

[19]  J. Slemrod,et al.  Evidence of the invisible: toward a credibility revolution in the empirical analysis of tax evasion and the informal economy , 2012 .

[20]  Erich Kirchler,et al.  Why Pay Taxes? A Review of Tax Compliance Decisions , 2007 .

[21]  Shlomo Yitzhaki,et al.  Income tax evasion: A theoretical analysis , 1974 .

[22]  M. Villeval,et al.  Tax Evasion and Social Interactions , 2004, SSRN Electronic Journal.

[23]  K. Gërxhani,et al.  Tax evasion and income source: A comparative experimental study , 2006 .

[24]  Mark A. R. Kleiman,et al.  When Brute Force Fails: How to Have Less Crime and Less Punishment , 2009 .

[25]  J. Baldry.  Tax evasion is not a gamble: A report on two experiments , 1986 .

[26]  Luigi Mittone,et al.  Sequences of audits, tax compliance, and taxpaying strategies , 2009 .

[27]  Petra E. Todd,et al.  A Theory of Optimal Random Crackdowns , 2010 .

[28]  J. List,et al.  The Behavioralist as Tax Collector: Using Natural Field Experiments to Enhance Tax Compliance , 2017 .

[29]  H. Robben,et al.  Tax Evasion: An Experimental Approach , 2010 .

[30]  U. Fischbacher,et al.  Are People Conditionally Cooperative? Evidence from a Public Goods Experiment , 2001 .

[31]  Fabio Galeotti,et al.  The efficiency of crackdowns: a lab-in-the-field experiment in public transportations , 2015, Theory and Decision.

[32]  Scott M. Gilpatric,et al.  Endogenous audits, uncertainty, and taxpayer assistance services: Theory and experiments , 2018, Journal of Public Economics.

[33]  R. A. Muller,et al.  The Good, the Bad, and the Regulator: An Experimental Test of Two Conditional Audit Schemes , 2004 .

[34]  Ernst Fehr,et al.  Third Party Punishment and Social Norms , 2004 .

[35]  R. Di Tella,et al.  The Role of Wages and Auditing during a Crackdown on Corruption in the City of Buenos Aires* , 2003, The Journal of Law and Economics.

[36]  Gary H. McClelland,et al.  Why do people pay taxes , 1992 .

[37]  Shlomo Maital,et al.  A simulation study of income tax evasion , 1978 .

[38]  R. Di Tella,et al.  The Role of Wages and Auditing During a Crackdown on Corruption in the City of Buenos Aires , 2001 .

[39]  Klaus M. Schmidt,et al.  A Theory of Fairness, Competition, and Cooperation , 1999 .

[40]  Navin Kartik,et al.  Strategic Communication with Lying Costs , 2009 .

[41]  U. Fischbacher,et al.  Lies in Disguise. An experimental study on cheating , 2013 .

[42]  Gary H. McClelland,et al.  Changing the Social Norm of Tax Compliance by Voting , 1999 .

[43]  U. Fischbacher.  z-Tree: Zurich toolbox for ready-made economic experiments , 1999 .

[44]  Dan Ariely,et al.  Self-Serving Altruism? The Lure of Unethical Actions that Benefit Others. , 2013, Journal of economic behavior & organization.