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Audit Uncertainty, Bayesian Updating, and Tax Evasion

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Author Info

  • Arthur Snow

    (University of Georgia, Athens, snow@terry.uga.edu)

  • Ronald S. Warren Jr.

    (University of Georgia, Athens)

Abstract

We extend the standard, one-period model of tax evasion to an inter-temporal framework in which an expected-utility-maximizing taxpayer updates expectations about the probability of a future audit based on past audit experience. This framework provides a theoretical grounding for the empirical evidence indicating that tax evasion is affected by taxpayers' perceptions of audit probabilities and is influenced by taxpayers' prior audit experience. We show that for a variety of risk preferences, Bayesian updating increases present and expected future tax evasion and reduces tax payments, inclusive of expected fines. These findings call into question the usefulness of Internal Revenue Service secrecy about audit probabilities for raising taxpayer compliance and expected tax revenue.

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Bibliographic Info

Article provided by in its journal Public Finance Review.

Volume (Year): 35 (2007)
Issue (Month): 5 (September)
Pages: 555-571

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Handle: RePEc:sae:pubfin:v:35:y:2007:i:5:p:555-571

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Related research

Keywords: subjective expected utility; audit probability; tax compliance; tax revenue;

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Cited by:
  1. Umberto Galmarini & Simone Pellegrino & Massimiliano Piacenza & Gilberto Turati, 2014. "The runaway taxpayer," International Tax and Public Finance, Springer, vol. 21(3), pages 468-497, June.
  2. Zhixin Dai & Robin M. Hogarth & Marie Claire Villeval, 2014. "Ambiguity on audits and cooperation in a public goods game," Working Papers 1403, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
  3. Edoardo Di Porto, 2009. "Audit, tax compliance and undeclared work: an empirical analysis," LABORatorio R. Revelli Working Papers Series 94, LABORatorio R. Revelli, Centre for Employment Studies.
  4. Simone Pellegrino & Massimiliano Piacenza & Gilberto Turati, 2008. "The Runaway Taxpayer or: Is Prior Tax Notice Effective against Scofflaws?," Working papers 1, Former Department of Economics and Public Finance "G. Prato", University of Torino.

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